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The American Prospect - articles by authorenPoliticians Bet the Farmhttp://www.prospect.org/article/politicians-bet-farm
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>Last spring, Kansas politicians decided to take government promotion of gambling to a new level, voting to make the state the first to actually own Las Vegas-style casinos. Not content, as other states, to merely tax the revenues of commercial gambling establishments, Kansas will own the casinos' buildings and rake in much of their proceeds. But the corporate giants and investors who own casinos in other states won't be left out. Kansas will partner with them to run day-to-day operations. The state's Republican legislature and Democratic governor, Kathleen Sebelius, endorsed the law as an answer to demands from the state Supreme Court to come up with more money for education. Rather than impose higher taxes or cut budgets, they bet on an easier road to riches. Watching Kansans flock to casinos in nearby Missouri and Iowa, political leaders decided to try to keep that money at home. </p>
<p>Kansas isn't alone. Officials in other states (over a dozen in 2007) are also scrambling to expand gambling, eyeing negotiated fees from American Indian tribes and tax revenues from commercial casinos. And, no longer satisfied with restricting casinos to rural areas, politicians are fighting to build them right downtown in the largest U.S. cities. As discussion of taxes has become taboo, politicians of both parties have been promoting gambling as a way to make a quick buck. Afraid to tell voters they need more money for government programs like education and public services, officials surreptitiously collect it by taxing gambling revenues. </p>
<p>It's not just a question of hidden taxing. When gambling comes to a community, crime, bankruptcies, suicides, and mental illness increase. City and county governments have to bear added costs for these problems, and local businesses often fold, as money that would otherwise be spent in the region flows into a corporate headquarters elsewhere. Despite opposition from many local citizens and business leaders, politicians have decided gambling is politically the easiest answer when they need immediate funds. The Rev. Tom Grey, field coordinator for the National Coalition Against Legalized Gambling, says Republicans' anti-tax rhetoric has caused "progressives to lose faith that there's a common good and a willingness to pay for goods and services." </p>
<p><b>A BIG GAMBLE</b> </p>
<p>Legalized gambling has spread rapidly throughout the United States. Two decades ago there was a social stigma attached to gambling, and only two states, Nevada and New Jersey, allowed commercial casinos. American Indian gaming barely existed. But gaming has come out of the back alleys and onto the main streets of small towns and struggling cities around the country. It is promoted as high-class entertainment, yet affordable to the masses. And business is booming, with more than 460 commercial casinos operating in 11 states. Casinos took $32.4 billion in gross gaming revenues in 2006, almost double the $17 billion of 10 years earlier. American Indian-run gaming has also taken off, following an official blessing by Congress in 1988. Currently, 423 facilities, run by 228 tribes, operate in 28 states, according to Alan Meister in the 2007-2008 Indian Gaming Industry Report. Tribes raked in $25.5 billion in 2006. On top of the casino money, Americans spent more than $56 billion on state-run lotteries. </p>
<p>While gambling supporters argue that casinos are always an economic boon for a region, research indicates otherwise. With the exception of Las Vegas and Atlantic City, studies show that for many casinos, most of their players live within a 50-mile radius. The money those gamblers lose would otherwise be spent within the region, at such places as restaurants, movie theaters, and retail shops. And when local businesses lose these customers, they fire employees, pay fewer taxes, and often close. A few years after a casino comes to town, increased crime and other problems result in local governments' needing more police, courts, mental health programs, and other services. In many localities and states, casinos do not bring in the money politicians had hoped. Commercial casinos pay wagering taxes to states, but they also displace existing sales tax revenue. American Indian casinos only pay the state and localities the fees they have negotiated, and often not that. </p>
<p>Despite this, legislators ignore the broader consequences and look at the immediate tax dollars casinos might provide. Critics see this as equivalent to states urging people to smoke in order to get more tax money up front, despite the long-term health-care consequences. "No political leader would say, 'Let's increase revenue by promoting cigarettes' -- it's absurd," says Les Bernal, who spent nine years as a top aide to a Massachusetts state senator, Susan Tucker, fighting casino legalization. "Yet, they do it with gambling." </p>
<p>The gambling industry does not like to be compared with the tobacco industry, and the American Gaming Association (AGA), its lobbying arm, touts its openness and concern for problem gamblers. The association was set up in 1995, after the industry was scared by a brief effort to pay for the Clinton health-care initiative by taxing gambling. Frank Fahrenkopf, former head of the Republican National Committee, was named AGA president. "I didn't want to come in to this job with the same sort of approach that the tobacco industry had had -- the denial," he says. He showed the board of directors the famous picture of tobacco executives swearing under oath at congressional hearings that smoking wasn't harmful. The board took that message to heart, and the AGA has spent over $20 million to fund research into gambling addiction. "We as an industry must commit to doing everything we can to help people who can't gamble responsibly," Fahrenkopf stresses. </p>
<p>Industry-funded research puts the onus on gamblers, emphasizing gambling addiction as a personal, psychological problem. It ignores casinos' enormous and sophisticated marketing efforts, which help create the problem gamblers. The reality is the gambling industry lives off of people who gamble excessively. Exactly how much casinos depend on problem gamblers is difficult to determine without opening up their accounting books. But a 1997 study by Henry R. Lesieur, founder of the Journal of Gambling Studies, found that problem and pathological gamblers spend roughly 30 percent of the cash taken in by casinos. </p>
<p>The industry expends enormous effort to keep people coming back. Casinos issue guests cards, which carefully track their visitors' betting activities. These provide a detailed profile of players, telling casinos how much people bet, what they like to play, where they eat. They also provide clues to what might entice them to return. Then casinos lure gamblers back with free gifts, including rooms, meals, limos, and free game time. "It's all about building player profiles, gathering information, and putting that in orderly form, so that at a later date, when marketing to those individuals, you can pinpoint events, incentives, giveaways for your clients, to give yourself the best chance of moving that client to your place," says a former marketing executive for a major Atlantic City casino. </p>
<p>The casinos are designed "extremely carefully," he says. "Where you put the tables, where you give access, the colors of the rooms, the ventilation, could mean all the difference." Casinos almost never have clocks and rarely have windows in game rooms, so gamblers lose touch with time. Round-the-clock restaurants keep people from wandering too far away. On the gambling floors, players are continually offered free drinks. Some casinos cater to young, more affluent gamblers, offering free rooms and dinners. Others focus on lonely, disabled seniors with time on their hands, providing free bus service from senior citizen housing. </p>
<p>Occasionally a casino official will approach someone losing heavily, who is showing signs of stress, and ask whether they want to leave. But unlike bars and restaurants, which will stop serving drunks, casinos rarely stop a gambler. And while some casinos do stringent credit checks before allowing gamblers to borrow money, or limit the checks they will cash, others are not so careful. In some cities such as Detroit, "you can borrow as much as you want," says a former casino official. Many casinos have voluntary exclusion forms that gamblers can sign, asking that they be thrown out and subject to arrest if they return. Admittedly, it is not always easy for staff at large casinos to spot these gamblers if they try to return, especially if they change their appearance or don't use the player cards. But a number of casinos have been sued by gamblers who charged they were not only allowed back in, even when spotted, but were actually induced back with free gifts. Casinos deny this. So far, the courts have sided with the casinos in these cases, or the suits were settled quietly. </p>
<p><b>TAKING THE BET</b> </p>
<p>The current gambling boom in the U.S. started with the growth of state lotteries. Fahrenkopf says that "the seminal moment" came in 1964, when taxophobic New Hampshire voters agreed to a state-run lottery. That changed the public's view on gambling, he says, because people believed, if a "state government is running a gambling enterprise, how can it be wrong?" The state-blessed lotteries attracted poor people who hoped to win big, and also legislators, who hoped their states would win big. Former Democratic Rep. Bob Edgar, now head of Common Cause, explains, "There are a whole class of people who think they will make millions from the lottery. Politicians also convinced people that the money lotteries would bring in would help seniors and schools. Once we went down this road, politicians began to see gambling money as an easy revenue source." </p>
<p>Although lotteries existed in the U.S. as far back as colonial days, by around 1900 they were all prohibited, thanks to numerous scandals. After New Hampshire gave them a rebirth, states throughout the Northeast, plagued by budget problems in the 1970s, also adopted them. States on the West Coast followed in the 1980s. While a few Southern states set them up, others resisted in the face of opposition from religious conservatives, who were against lotteries on moral and religious grounds, and liberals, who opposed lotteries as a regressive tax, because numerous studies showed that the heaviest players were the poor. Southern resistance gave way in the late 1980s, thanks in large part to James Carville, the political guru who helped Bill Clinton get elected, says Randy Bobbitt, author of the book, Lottery Wars, about the politics behind Southern lotteries. In 1987, Carville was trying to elect an unknown businessman, Wallace Wilkinson, as Kentucky's governor. "He wanted an issue no one was talking about," Bobbitt says. He found it by promoting a lottery as a new way to fund education. This was the key to Wilkinson's election. </p>
<p>Today, 43 states and the District of Columbia run lotteries, which are still widely promoted as the only way to bring in additional money for education. But the reality is that, while initially lottery money often adds to regular education budgets, as time passes it often is used just to maintain levels of education spending. In Florida, for example, as education budgets were diverted for other uses, and as lottery sales flattened and student enrollment increased, spending per student ended up below pre-lottery days. "If the lottery has bad sales one year, schools lose out," Bobbitt says. </p>
<p>State lotteries opened the door to American Indian gaming. In the early 1980s, several tribes started high-stakes bingo parlors, but their states objected. After fights in local courts, a landmark 1987 Supreme Court decision ruled that if a state allows a form of gambling, then American Indian tribes within that state are allowed to engage, unregulated, in that form of gambling. The following year, Congress passed the Indian Gaming Regulatory Act, establishing the legal structure for American Indian gaming. A key provision requires tribes to sign a compact with a state if they want slot machines or casinos. These compacts usually detail how much gaming revenue the tribe will share with the state. </p>
<p>While the Indians were busy setting up casinos on their reservations, the cowboys were also determined not to be left out. In the late 1980s and early 1990s, gaming interests promoted a revival of Old West gambling saloons in historic Colorado and South Dakota mining towns and gambling riverboats along the Mississippi and Missouri rivers. Although there was popular opposition, legislators and governors in six river states, which were suffering hard economic times in the late 1980s, promoted gambling as a source of revenue. Iowa led the way, followed by Illinois, Indiana, Missouri, Mississippi, and Louisiana. Because there was strong public opposition when the riverboats first started plying the waters, there were strict limits on when, and how, people could gamble. Boats had to be moving and could only operate for limited hours, and in some areas, losses were limited, too. But as more and more states allowed gambling boats, competition took away customers. So states started lifting restrictions. It did not take long for the moving gambling casinos to become stationary. Then it was only a short leap to building riverfront casinos. </p>
<p><b>THE PAYOUT</b> </p>
<p>So what is really wrong with all this if tribes and towns benefit and people are entertained? "If it was just harmless entertainment, it wouldn't be a public-policy question," says Earl Grinols, a Baylor University economics professor who has researched gaming extensively. Casinos exact a tremendous toll, Grinols says, and the odds are not in society's favor. "My estimate is there is a 3.1 to 1 cost to benefit [ratio] to society as a whole," he says. Grinols and David Mustard, a professor at the University of Georgia, studied data on all U.S. counties, spanning 19 years. They found that in the three to four years after a casino came to town, crime (including robberies, burglary, embezzlement, fraud, and assaults) increased by 8 percent. This forced budget increases for law enforcement, courts, and other services. Gambling also exacerbates other social problems, including suicides, bankruptcy, divorce, domestic violence, and mental illness. This, in turn, necessitates expenditures by local governments. Grinols estimates that society spends $10,300 per pathological gambler. Even when governments get tax revenues from casinos, he says, overall they lose money. </p>
<p>Despite these costs, government officials look to the quick returns they can get from casinos. At times, though, they don't even get this money. In Michigan, for example, the state negotiated to get 8 percent of the slot machine revenues from casinos run by nine tribes. But one by one, eight of the tribes stopped paying, claiming the state had violated the agreement. Also in Michigan, tribes promised to use some of their profits to aid local communities, to offset the crime, traffic, and other problems caused by casinos. But a Detroit Free Press investigation revealed that tribal money in Michigan earmarked for such uses went instead to pay for such things as tribal members' taxes, a historical documentary, and homemaker groups. </p>
<p>Even if they do take in casino money, states lose out on sales tax revenue. Since most people have a limited amount of disposable income, money spent at casinos would otherwise buy taxable items or be used at restaurants and stores. A fiscal analyst for Indiana's legislature looked at 19 years' worth of multi-state data and concluded that eight of 12 states lost sales tax revenues when large-scale commercial casinos opened. States could offset this loss by having sufficiently high wagering taxes on casinos, but only four of the eight did. Fahrenkopf disputes the idea that casinos reel in money that would be spent elsewhere in the area: "All the economic studies say that's a bunch of bull because what you've gotten is new revenue coming in, new jobs in the area, new restaurants being built, new motels and hotels." But very few cities have had an economic revitalization because of a casino, and even Fahrenkopf admits that three casinos have not been able to rebuild inner-city Detroit. </p>
<p>More and more local business leaders are seeing beyond the hype that casinos spark an economic boom, and are opposing them out of concern they will actually harm the local economy. Even in Kansas, where the government will now run the casinos, the Wichita Metro Chamber of Commerce board voted last June against a casino in the county. Its vote followed a study by Wichita State University showing a casino would cost the county $1.4 billion over 20 years, when benefits, including jobs and revenues, were compared with the fiscal and social costs. </p>
<p>The Wichita business community is not alone. Mike Jandernoa, a business leader in Grand Rapids, Michigan, became interested in a nearby American Indian tribe's plan to build a casino when the local chamber of commerce expressed concern. Jandernoa reviewed a consulting company analysis of the casino and became worried about the casino's impact on his employees, "about the distraction, the tardiness, bankruptcy and divorce." The study also showed a casino would take consumer spending away from local restaurants, bars, and retailers, and that Grand Rapids and the surrounding area would lose more than $600 million over 10 years. The state as a whole was projected to lose $300 million, largely due to money taken out of state by investors and management companies. "It has been promoted as this idea of being a tourist attraction that we can use in difficult economic times," says Jandernoa, who leads a business coalition that so far has slowed, but not stopped, the casino's development. "Well, we've grown to 23 casinos, and our economy has lost jobs and population." </p>
<p><b>PLAYING POLITICS</b> </p>
<p>Voters in many states have opposed casinos time and again, only to see them legalized by legislators. Only two states, Michigan and South Dakota, approved casinos by a statewide public vote between 1988 and 2002. In the more than two dozen states that okayed casinos during that time, it was the legislature that brought them in, even over public opposition. For example, Iowa voters rejected the idea in 1985 and 1988, and polls showed they were ready to do so again in 1989, when the legislature endorsed it. </p>
<p>Perhaps this legislative support has something to do with the millions of dollars the industry pours into state campaigns. In the 2006 election cycle, the industry gave $70 million to state candidates, according to the National Institute on Money in State Politics. It also spends lavishly on advertising when there are ballot referendums. In 2006, six gambling-related measures were on the ballot in five states. Committees backing or opposing these measures raised $54 million, 89 percent of it coming from gambling interests. Despite the expensive campaign, three states rejected an expansion of American Indian casinos, video games, or slot machines. Only in Arkansas was gambling expanded, but just for charities to run bingo games. And South Dakota kept its video lottery. These votes show significant public opposition to casino expansion. Last April, after the Maine legislature endorsed a measure to allow a second casino to open in the state, the Democratic governor, John Baldacci, vetoed the legislation. Two years earlier, Baldacci had vetoed a similar measure, saying that the social and economic costs of gambling were too great. In November 2007, Maine citizens endorsed Baldacci's position, voting down a referendum to expand gambling. </p>
<p>Gambling is a hot issue at the national level as well. In the run-up to the Nevada Democratic primary in January, Hillary Clinton used gambling industry executives affiliated with her campaign to criticize Barack Obama for his opposition, as a state senator, to using gambling for budget-deficit reduction. (He had expressed concerns about its "moral and social costs" and about the money the industry pours into politicians' coffers.) Obama did not take on the industry in Nevada, and his campaign responded to the Clinton attack by saying the state was a model for regulating gambling. </p>
<p>At least 10 states are currently debating casino regulation and expansion. In some areas, such as Philadelphia, there are active citizen groups fighting casinos. Business leaders like Grand Rapids' Jandernoa are looking for economic development based on companies that can provide "an economic engine that would be sustainable" to revitalize their depressed cities. </p>
<p>While opponents have at times succeeded over the heavily financed campaigns of the casino interests, it is not easy. Despite earlier polls showing that California voters were poised to defeat measures on Feb. 5 expanding Indian gaming, in fact they ended up endorsing them, after an expensive effort by the pro-gaming side. But if the public and business show strong opposition, politicians may yet get the backbone to resist the spread of gambling, especially since, with so many casinos already operating, new ones may be in political leaders' own backyards. That's something even Frank Fahrenkopf doesn't want. During a 2006 debate in Cleveland he admitted, "If someone were to come along and tell me they were going to put a casino in McLean, Virginia, where I live, I would probably work very, very hard against it. What's the old saying? NIMBY. Not in my backyard."</p>
</div></div></div>Fri, 22 Feb 2008 00:06:30 +0000147015 at http://www.prospect.orgBarbara DreyfussWhat Hedge Funds Riskhttp://www.prospect.org/article/what-hedge-funds-risk
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>Brian Hunter thinks he knows something about hedge fund investing. The 33-year-old Canadian energy trader is starting his own firm and reportedly has already raised nearly $1 billion for the endeavor. No matter that Hunter was largely responsible for risky natural gas investments, which last September lost more than $6 billion for his then-employer, Amaranth Advisors, one of the largest hedge funds, causing it to collapse. No matter that the San Diego County pension fund is suing him for $150 million of the $175 million they invested with Amaranth, saying Hunter failed to deliver the diversified and risk-controlled investment strategy he had promised. No matter that a Senate committee is investigating manipulation of the natural gas futures market related to Hunter's investments. </p>
<p>Hunter's investment strategies were already being questioned when he went to Amaranth in 2004, embroiled in lawsuits with his former employer, Deutsche Bank. But because hedge funds operate in the shadows, with scant regulation of their investments or the information they give investors, there's little to keep Hunter from continuing to recklessly invest other people's money. </p>
<p>Hunter can maintain his career because hedge funds are money managers that make enormously risky investments but are nonetheless virtually unregulated. Once, hedge fund investors were limited to the very rich, and few political leaders were concerned about what they did. But there's a new urgency for reform now because that is no longer the case. Increasingly, pension funds, school endowments, and charities in pursuit of easy money are turning to these investments and potentially putting their funds in jeopardy. Currently, about 20 percent of pensions invest in hedge funds. Although, on average, they invest about 5 percent of assets, some invest much more. And a law signed by President Bush last summer makes pension investment in hedge funds even easier. At the same time, nearly two-thirds of endowments, including university and charitable organizations, invest through hedge funds, allocating an average of 18 percent of their invested assets. A Bank of New York study estimated that by the end of the decade, institutions, including pension funds, would account for about one-third of new money to hedge funds. </p>
<p>Even the viability of corporations is being put at risk by hedge fund managers' demands that they allocate money to shareholders, rather than invest for long-term growth of the company's plant, equipment, and workforce. And regulators worry, too, that if a large enough hedge fund abruptly collapses, it could broadly destabilize financial markets. </p>
<p>This relatively sudden expansion is receiving new scrutiny on Capitol Hill, in state legislatures, and from international economic organizations. Pressed by German officials, members of the Group of Eight nations held two meetings on hedge funds so far this year, and International Monetary Fund officials have been publicly raising an alarm. On Capitol Hill, just a few months after he took over the House Financial Services Committee in January, Democratic Representative Barney Frank launched a series of hearings on hedge funds. "Many of us are concerned about the effect on workers and employers,"warned the congressman at his March hearing. </p>
<p>In the Senate, Finance Committee member Charles Grassley, a Republican, after failing by amendment to empower the Securities and Exchange Commission (SEC) to oversee hedge funds, formally introduced legislation to do so in May. In Connecticut, home to many hedge funds, state Attorney General Richard Blumenthal warned that "hedge funds remain a regulatory black hole." He has been working with state legislators to get better visibility into their activities. </p>
<p>There are, however, significant obstacles to reform, not least of which are the millions of dollars that hedge fund managers contribute to political campaigns, including those of nearly every presidential candidate in the 2008 race. The question is whether the cowboys of Wall Street can be reined in before innocent people get hurt. </p>
<p>Ironically, hedge funds were conceived as a way for investors to protect their money by "hedging"the risks of long-term stock investments. Unlike mutual funds, which only invested in stocks and bonds and made money only when prices rose, hedge funds were able to invest in ways that could make money if stock, bond, commodity, and currency prices fell. So they were careful about balancing investments and not exposing clients too much to one investment strategy. </p>
<p>While a few hedge funds existed earlier, they took off in the 1970s and 1980s because new investment opportunities were created in world currencies and in the futures and options markets, which opened up commodity trading and allowed leveraged investing. Investors could make big bets, magnifying their potential wins (or losses), while only putting down a little money. </p>
<p>This was the time of legendary commodity and currency traders such as George Soros, Bruce Kovner, Julian Robertson, and of enormous hedge fund profits, ranging from 50 percent to 100 percent. These traders were very good at making money for their investors, and many wealthy people sought them out. They were so good that investors were willing to give them 20 percent of profits, along with 2 percent fees. John Makin, a scholar at the American Enterprise Institute and a principal at a major hedge fund, Caxton Associates, told a forum two years ago that "in the first 10 years of the industry, they were all superb risk managers." </p>
<p>Hedge funds were allowed to be exempt from the securities laws regulating mutual funds because their clients were limited to the very wealthy: Only people with a net worth of more than $1 million or with $200,000 in income could buy in. Rich investors were considered sophisticated enough to evaluate their managers. And if they lost money, nobody was too worried. In the 1980s, the largest hedge funds managed several hundred million dollars. They had a limited number of investors, and were concerned with building long-term relationships with them. Due to their successes, the number and size of these funds grew dramatically, and by the early 1990s the largest managed more than a billion dollars. </p>
<p>But success created problems. As more and more hedge funds were set up, there were not enough stellar managers who could earn returns of 50 percent or more. And as the hedge funds received more money to manage, there was just too much money chasing too few opportunities. In the late 1990s, some funds actually reduced their size, returning money to investors. </p>
<p>The problems of low-performing managers and too much money under management grew worse in the early 2000s as the stock market bubble -- and stocks such as Enron's -- collapsed. With mutual fund earnings tanking, individual investors, pension funds, and endowments started pulling out of them, looking for better returns. Money poured into hedge funds and new ones popped up everywhere. In 1990 there were 610 hedge funds trading in U.S. dollars, according to Chicago-based Hedge Fund Research (HFR). The number increased to 3,873 by 2000, and to 9,462 today. Assets grew as well, and today HFR says hedge funds manage nearly $1.5 trillion. The top three hedge funds today manage more than $30 billion each, and at least a dozen have more than $10 billion in assets. </p>
<p>Many of the new funds were started by former mutual fund managers whose funds and salaries had collapsed, and many of these managers were unprepared for the fast-moving and complex world of hedge fund management. This inexperience, coupled with enormous growth in the assets of hedge funds, set the stage for many of the problems that are surfacing today. Hedge fund managers are under pressure to replicate the huge returns of the 1980s, but today's conditions mean that is very difficult. This has led many of them to try riskier ways of making money. Hedge fund managers, under pressure from their clients, watch returns "daily, even hourly,"says Jeff Wiggins, a recently retired money manager who worked for pension funds, a hedge fund, and a mutual fund. If they see losses, they "have an incentive to take on higher risk to get into the black." </p>
<p>Many hedge funds have abandoned hedging altogether because it eats up some of their returns. They are branching out into many areas and trying to be experts in all of them. "Hedge funds no longer focus mainly on stocks, bonds, and currencies,"longtime hedge fund manager Jeffrey Matthews told a House hearing in March, adding that many no longer actually hedge against market declines. Instead, he warned, they have "branched into subprime debt, distressed securities, real estate, uranium ore, and even grain sales" -- areas that are more complex, and in some cases more inherently risky, than more traditional investments. </p>
<p>Fund managers are also willing to take big risks since they don't lose money themselves if their investments tank. Under the current system, they get 20 percent of any earnings, but pay nothing if their investments fail. It is only their clients who lose. "If a hedge fund manager racks up a nasty loss, he or she can just walk away … and leave the losses to the clients,"says Wiggins. And so hedge funds are quick to come and go. Of about 40 firms one job-hunting manager says he interviewed with four years ago, none are in existence today. In 2005 there was an attrition rate of 11 percent, according to HFR. That year there were 8,661 funds; 2,073 were brand new and 848 closed up shop. </p>
<p>The frenzy for returns is raising the possibility that hedge funds will do whatever it takes, including manipulating the market, to profit. As officials of the British financial regulatory agency have warned, today's hedge fund managers are "testing the boundaries of acceptable practice with respect to insider trading and market manipulation." </p>
<p>Stock price manipulation by hedge funds has been rumored in corporate corridors for years. Hedge funds retorted that companies were just trying to prevent exposure of their problems. Indeed research done by hedge funds has helped expose corporate corruption, such as at Enron. But the frenetic Jim Cramer, who ran a major hedge fund, Cramer, Berkowitz &amp; Co., for more than a dozen years, recently boasted publicly that market manipulation is indeed how the system works. In a December 2006 appearance on <i>Wall Street Confidential</i>, an Internet show that is part of his financial news, commentary, and video conglomerate, Cramer detailed how easy it is to manipulate stock prices. Suppose, said Cramer, his investments were tied to Apple's stock tanking, and suppose that stock began to rise. In such a case, he said, he would, "pick up the phone and call six trading desks"at brokerage houses and tell them people at Verizon were panning Apple. "That's a very effective way to keep a stock down,"he chuckled. "I might also buy January puts" -- stock options that anticipate a stock going down. This, said Cramer, creates an image that bad news is coming. And, he added, you then call investors and reinforce that image. "The way the market really works is you hit the nexus of the brokerage houses with a series of orders that can be leaked to the press, and you get it on CNBC, and then you have a vicious cycle down." </p>
<p>Today some corporations are so convinced that hedge funds are trying to destroy them they are going to court. Last July, Fairfax Financial Holdings, a large Canadian insurance company, filed a $6 billion lawsuit charging that a group of hedge funds ran a vicious campaign to discredit the company and drive its stock price down in order to reap millions in profit. The lawsuit claims that the hedge funds sent emails and made phone calls to employees, investors, regulators, and the press implying that the CEO had embezzled church money, cooked the firm's books, and lied about the company's business successes, among other actions, to send the stock price down. Lawyers for the hedge funds refused to comment. </p>
<p>Two other companies, Biovail and Overstock.com, have filed lawsuits charging hedge funds with conspiring with independent research analysts to issue false reports that would drive down their stocks. The research company has denied this, as have the funds. But three employees of the research firm submitted sworn affidavits in the lawsuits giving support to the charges. </p>
<p>The independence of research companies may also get continued scrutiny, given that hedge funds are often the main buyers of their products. Even if they don't control what is written, hedge funds want inside information about when reports will be issued or what they might say, both of which can move stocks. One former hedge fund employee says she was urged to date investment analysts so she could learn such information. </p>
<p>There is also widespread worry that hedge funds are using their enormous clout with brokers and investment banks to get inside information about mutual fund trading activity. Hedge funds have become the most important clients of Wall Street brokers and bankers like Merrill Lynch, Bear Stearns, and Morgan Stanley. When they trade their $1.5 trillion in assets, they pay these banks and brokers high fees, usually much higher than mutual funds. Hedge funds account for about 30 percent of all stock trading. That means a lot of trading fees, plus more for the many other services the banks and brokers provide to them. "They are the biggest clients on Wall Street,"says Stan Schifman, who recently retired after 35 years working for brokerage houses as a senior institutional salesman. "Wall Street caters to these people."Last year SEC Commissioner Roel Campos, a former federal prosecutor appointed to a second term at the SEC by President Bush, warned that "broker-dealers may place the interest of hedge fund clients over the interest of other clients." </p>
<p>SEC chairman Christopher Cox told leaders of the SEC's regional offices in March that policing possible insider trading by hedge funds would be a top regulatory priority for the agency over the next two years. The SEC is currently investigating reports that hedge funds get advance word from brokers about mutual fund trades. The investigation was prompted, in part, by the Investment Company Institute (ICI), which represents mutual funds. "A major concern of the Institute is the leakage of mutual fund trading information,"says Ari Burstein, senior counsel of the ICI. "This is a critical issue for mutual funds and their 94 million shareholders."Brokerage firms and hedge funds have already paid hundreds of millions of dollars in fines over the last several years for unlawful joint activities in the purchase of mutual funds. Last year, for example, the SEC fined Bear Stearns Securities $250 million for a pattern of illegal late trading of mutual funds over four years. An SEC official warned at a hedge fund conference two years ago that the agency had identified 400 hedge funds they believed were participants in these schemes. </p>
<p>Another major concern is that the huge growth in assets that hedge funds manage now allows many of them to buy enough shares of corporate stock to control even large corporations. The fear is they will seek radical changes that might bring them quick profits, but ruin the company. Campos recently warned that this activism raises the specter of "the corporate raider"of the 1980s. "Hedge funds may attempt any number of measures to extract the maximum financial benefit from their investment, including trying to force a sell-off of assets and restructuring remaining operations,"he warned. "During the 1980s, this often meant plant closing, mass layoffs, demands for wage and benefit concessions from workers, and seizure of pension plan assets. Despite the passage of time, the same concerns may be legitimate today."This concern is echoed by Ron Blackwell, the chief economist at the AFL-CIO. Hedge funds, he warns, may get huge returns on their investments in companies by "reorganizing them, often at a disadvantage to the people who work for them, or in some cases, to the survival of the company itself." </p>
<p>Recent events at Algoma Steel show there is reason to worry. The management and union at the Canadian company waged a long fight against demands by a hedge fund, Paulson &amp; Co., which recently bought 19 percent of the company. Paulson, the largest shareholder, wanted an immediate return on its investment in the company, and demanded that Algoma distribute $400 million Canadian of its cash reserves to shareholders. Paulson also wanted to replace Algoma's board because it had rebuffed earlier efforts for a payout. Company management refused, saying steel and raw material prices were fluctuating and the money might be needed if prices went up. The United Steelworkers union argued the money should be used to pay for a needed blast furnace upgrade, to meet pension benefit and debt obligations, and to ensure the long-term viability of the company. But the continued demands from the hedge fund finally forced the company to cave, though they were able to reduce the payout to shareholders to half of the original demand. </p>
<p>Although world leaders, international and U.S. regulators, and members of Congress are all raising concerns about hedge funds, regulatory oversight is not likely to happen soon. On the international front, German efforts to implement greater oversight of hedge funds have been met with resistance from U.S. and British officials. Domestically, the modest effort two years ago by the SEC, under its previous chairman, to require funds to register with the commission and to keep auditable records, was struck down by an appeals court last year, prompting Grassley's recent legislative efforts. While Barney Frank has taken up the issue in the House, it is not yet clear how far he wants to go or what support he will get. A recent report by a presidential advisory group, headed by the Treasury Secretary, concluded that the current oversight structure was adequate. </p>
<p>So far, there is little indication that things will change in the next administration, given the support hedge fund managers are giving to presidential aspirants of both parties. Democratic hopefuls, including Hillary Clinton, Barack Obama, Christopher Dodd, and John Edwards, as well as Republican hopefuls Rudolph Giuliani, John McCain, and Mitt Romney, have all raised tens of thousands of dollars from hedge funds. Clinton, Giuliani, and Obama all count hedge fund executives as important fund raisers for them. Giuliani considers Paul Singer, founder of the $7 billion hedge fund Elliott Associates, a major policy adviser. Edwards worked for a year as an adviser to the hedge fund company Fortress Investments, but quit when he launched his presidential bid. So far there is little talk among the candidates about hedge funds, except how much they will contribute to campaigns. </p>
<p>In 1929 stock manipulation, insider trading schemes, and massive speculative investments, brought down Wall Street and led to the Great Depression. But it was only after the damage was done that these schemes came to light. In 1933, after the election of a Democratic president, Franklin Delano Roosevelt, and a Democratic Senate, a stalled investigation into what had happened came to life. The findings of the investigation, dubbed the Pecora Commission after commission leader and Senate Banking Committee chief counsel Ferdinand Pecora, shocked the country and led to the securities laws that oversaw most of Wall Street's activities. </p>
<p>Oversaw most of Wall Street, that is, until now. Today a huge chunk of Wall Street's assets and much of its activities are once again shrouded in secrecy and unregulated. In his memoirs, Pecora wrote that the Wall Street schemes that led to the 1929 collapse could "not long have survived the fierce light of publicity and criticism."The question is whether Congress will forcefully investigate, now, what is happening in the murky hedge fund world, or whether it will take a major blow-up to force action.</p>
</div></div></div>Sun, 17 Jun 2007 22:05:48 +0000146379 at http://www.prospect.orgBarbara DreyfussEvasive Maneuvershttp://www.prospect.org/article/evasive-maneuvers-1
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>The newly elected Democratic leaders in Congress are gearing up for a broad array of oversight hearings and investigations of the Bush administration. However, they are likely to butt heads with a Justice Department intent on thwarting their efforts -- as Republican Senators Charles Grassley of Iowa and Arlen Specter of Pennsylvania did recently when they tried to scrutinize administration actions.</p>
<p>The Justice Department, which serves as legal counsel in court proceedings for other departments, has repeatedly gone beyond merely protecting its own actions from scrutiny. Even when Congress was in Republican hands, Justice Department officials advised other government departments on how to stonewall congressional review. These efforts now appear to be ramping up.</p>
<p>The Justice Department Legal Counsel's office recently held meetings with lawyers of other departments to discuss strategy for responding to congressional requests for documents and hearing appearances. In January, Senator Grassley charged at a Senate Judiciary Committee hearing that the DOJ has started running training "events" for other offices of the executive branch, teaching them how to handle congressional inquiries and hearings. Grassley's office says they were tipped off to this by someone in the Justice Department worried about this new program.</p>
<p>Grassley voiced concern that the new training sessions are "lessons to stiff-arm Congress." He said he drew this conclusion from the "unnecessary hurdles and roadblocks from the department" he encountered in his recent efforts to investigate the FDA, the FBI, and the SEC while chairman of the Senate Finance Committee. Responding to Grassley at the hearing, Attorney General Alberto Gonzales denied there was any "coordinated effort to try to coach them about how to answer questions." Rather, he said, "it's to make sure that we are providing the appropriate level of cooperation, because we do have an obligation -- to try to accommodate competing legitimate interests."</p>
<p>Grassley's exchange with Gonzales occurred during the first Judiciary Committee oversight hearing held by its new Democratic chairman, Patrick Leahy of Vermont. Leahy has expressed concern repeatedly over the years about DOJ's unresponsiveness to his questions. In December, the Justice Department rebuffed a request from him for documents on the detention of suspected terrorists. Leahy, Charles Schumer of New York, and other senators clashed with Gonzales at last month's concerning the DOJ's lack of cooperation with congressional inquiries into DOJ's own controversies, including charges of illegal wiretaps and sending detainees abroad to be tortured. Grassley criticized the DOJ for refusing for years to brief Congress about its investigation into the 2001 anthrax attacks, and accused it of "thumbing the nose at congressional oversight."</p>
<p>But Grassley moved beyond those issues in demanding to know if the Justice Department was also teaching other agencies to be evasive and stymie congressional inquiry through its training sessions. The senator was particularly concerned that some training sessions are being run by the Office of Legislative Affairs, which, he charged, was "the source of unnecessary and inappropriate foot-dragging in many of my oversight efforts over the years."</p>
<p>Before the hearing, Grassley had requested materials the DOJ was using in the training sessions, in order to question Gonzales about them. But the Attorney General claimed he had never received the request. Gonzales promised to find out why the documents weren't delivered. Grassley says he still hasn't received any materials from the DOJ and questions whether Justice is really making a "sincere effort" to respond.</p>
<p>Despite the fact that the Attorney General did not dispute Grassley's premise at the hearing, a Justice Department spokesman denied to the <em>Prospect</em> that the agency even has a "training program" on congressional hearings. But he acknowledged that if other executive agencies ask for it, DOJ does give "confidential advice on congressional oversight."</p>
<p>An activist Democratic Congress may give added back-up to several investigations, launched by both Grassley in the Finance Committee and Arlen Specter in the Judiciary Committee, that have provoked resistance from the DOJ. Grassley has conducted high-profile hearings on the FDA over the past several years, featuring a number of whistleblowers, and previously lambasted the DOJ for attempting to stall or frustrate his investigations of FDA and HHS.</p>
<p>Last summer, the Finance Committee was looking into the role of falsified clinical data in the FDA approval of a drug. After Grassley accused the Justice Department of working with HHS to obstruct that investigation, finance committee staff were blocked from interviewing FDA investigators by the Justice Department. Grassley took the extraordinary step of going directly to FDA offices to speak with FDA personnel, but was still not allowed access to them.</p>
<p>In a December hearing of the Judiciary Committee, just before Congress changed hands, Grassley and the panel's then-chairman, Specter, uncovered further evidence of Justice Department collusion in efforts to thwart congressional inquiry and intimidate whistleblowers. This involved the unheard-of step of subpoenaing confidential discussions between a whistleblower and congressional staff.</p>
<p>That hearing focused on charges, by former Securities and Exchange Commission attorney Gary Aguirre, that an investigation into insider trading by one of the largest hedge funds was squelched by SEC officials. Aguirre had wanted to take testimony from a prominent Wall Street figure, who was also a major fundraiser for President Bush. When he pressed the point, he was not only prevented from doing so -- he was fired.</p>
<p>After Aguirre wrote a letter to SEC Chairman Christopher Cox in September 2005 exposing these events, the Inspector General of the SEC, Walter Stachnik, conducted a cursory investigation into Aguirre's accusations. Without even questioning Aguirre, but only talking to the SEC officials he had accused, the IG dismissed the allegations. Last week, in an interim report on their investigation into the entire matter, Grassley and Specter castigated the IG for a "seriously flawed" investigation.</p>
<p>After the IG's whitewash investigation, Aguirre went to the Senate Judiciary and Finance Committees, which began a serious investigation. Committee staff reviewed thousands of pages of material and questioned numerous witnesses. Under intense congressional scrutiny, the SEC reopened its inquiry into the hedge fund and the Inspector General renewed his review of SEC officials.</p>
<p>But the IG went further, much further, than merely reopening his investigation into SEC actions. He issued a subpoena to Aguirre, which went beyond a request for documents supporting his charges. It included an extraordinary demand, unheard-of by Grassley and his staff, for communication between the whistleblower and Senate investigators.</p>
<p>The Justice Department, acting as the IG's lawyer, attempted to enforce the subpoena. They did that even after Aguirre had provided 250 pages of details supporting his allegations.</p>
<p>Questioned repeatedly by senators at the December Judiciary Committee hearing as to why he needed congressional staff communications, the IG continually hid behind the Justice Department, which he said had advised him not to discuss it. "You may be playing footsy with an executive branch of government that wants to curb congressional inquiries even beyond this one" an exasperated Grassley warned.</p>
<p>Grassley and Specter raised "constitutional objections" to the subpoena with the Justice Department. They saw it as a direct attack on Congress's role as watchdog over the executive. Grassley told the <em>Prospect</em> that "if whistleblowers know that we would give out information that came to us, we're not going to have any whistleblowers come to us anymore. They have to trust us." </p>
<p>And Aguirre says the subpoena also punished whistleblowers -- he says he has "had to spend thousands of dollars on an attorney."</p>
<p>Specter, in <a href="http://frwebgate3.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=2588565032+4+0+0&amp;WAISaction=retrieve">releasing</a> the interim report on the SEC investigation, labeled the subpoena a "preposterous" action. He emphasized that Congress has "constitutional oversight responsibilities, and we obviously cannot conduct those responsibilities if the information we glean is going to be subject to somebody else's review," He and Grassley made clear they intend to pursue it further. </p>
<p>The Justice Department and IG now seem to have backed off their demands for staff communications, after it became clear that the Senate's lawyer backed Grassley and Specter, and was ready to go to court. And so that confrontation with the Justice Department has receded. But with Democrats on the Hill launching a myriad of hearings and investigations, things are not likely to stay quiet for long.</p>
<p><em>Barbara T. Dreyfuss is a </em>Prospect<em> senior correspondent.</em></p>
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</div></div></div>Fri, 09 Feb 2007 22:56:25 +0000146022 at http://www.prospect.orgBarbara DreyfussDoctoring Health Care, Ihttp://www.prospect.org/article/doctoring-health-care-i
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>For all the hype over the Democrats retaking Congress, you'd think the reemergence of that body's liberal lions would, in short order, bring about universal health care and a host of other panaceas. Winning universal health care, alas, remains unlikely, at least in the near term. Instead, repairing the cracked foundations of Medicare and Medicaid will dominate the health agenda, and if the Democrats have any energy left, they may try to stabilize the employer-based health system, too. But if the Democrats are smart, they'll go one step further, using their control of committees and their ability to set the agenda to lay the groundwork for a major universal health-care push in 2008 -- one that may boast a surprising array of new allies. </p>
<p>It's true that for the next two years the Democrats will be hamstrung in their legislative efforts by the threat of a presidential veto. So their first order of business will be a series of investigations and hearings showcasing how Republicans have undermined the stability of Medicare, rammed through a capricious and inadequate drug benefit, ignored soaring insurance costs and the number of uninsured, and further damaged the already precarious employer-based insurance system. But attaining significant improvements in these areas will take a wider Democratic majority in the Senate as well as a change in occupancy at 1600 Pennsylvania Avenue. California Democrat Pete Stark, who returns as chairman of the important House Ways and Means health panel, says “We're going to have to do this slowly and we're going to have to reach out to build a bi-partisan coalition. … I don't want to spoil our chances for making bigger strides in 2008, when arguably we have a good chance to win the White House.” </p>
<p>Even the much-touted promise, from incoming House Speaker Nancy Pelosi of California and Senate Majority Leader Harry Reid of Nevada to pass a measure in the first 100 legislative hours that would allow the government to negotiate drug prices with manufacturers will be largely symbolic, given Health and Human Services Secretary Michael Leavitt's emphatic statement that he doesn't want such authority. More useful would be a measure that more than 130 House Democrats, including Pelosi, co-sponsored last Congress offering seniors the option of enrolling in a government-run drug plan that would compete with private plans. Unleashing Medicare's cost and administrative efficiencies on prescription-drug purchasing would be good for seniors and for advocates of a strong Medicare program. </p>
<p>Meanwhile, even if such health-care legislation stalls, simply debating it would jump-start discussion over the future of Medicare, both as a government entitlement for seniors and as a program for covering the nearly 47 million people without health insurance. Debate on the uninsured will also be sparked by hearings on the State Children's Health Insurance Program, which covers about 8.5 million children and must be renewed this year. Many Democrats want to expand this program to more children as well as their families. </p>
<p>At the same time, five congressional committees are required by law to hold hearings in 2007 on options for insuring all Americans that were recently released by a nonpartisan panel that Congress created three years ago. The panel concluded that most Americans want a national, universal coverage system. And a surprising array of business leaders, labor union officials, consumer activists and health-care industry executives may agree. “It is one of those times, it is like 1992 again,” says Robert Galvin, who oversees the $3 billion General Electric spends on health care annually. Galvin is referring to the health-care crisis of the early 1990s, which led President Clinton to take a serious crack at comprehensive reform. “It is like it was 15 years ago, in terms of business interest in getting into the dialogue.” </p>
<p> “Conditions are there to drive health care to the top of the agenda,” John Rother, policy director for AARP, told a recent forum. Public surveys show that paying for health care is the public's top concern; people worry about it more than they do rent or terrorism. And these worries will intensify. Surveys of insurers indicate premiums will jump another 10 percent to 13 percent next year. “A majority of Americans do have health coverage and it's the issue that premiums, co-pays, and deductibles are going through the roof,” says Alan Reuther, the legislative director of the United Auto Workers (UAW), whose members have been reeling from increased health-care costs the auto industry is shifting to them. </p>
<p>For the past six years, as costs soared and the numbers of uninsured grew, the Bush administration and Congress offered platitudes and tax-free health savings accounts (HSAs) as a solution. But employers have been reluctant to offer these accounts and employees have been even less eager to sign up. A recent Kaiser Family Foundation survey of more than 3,000 firms found only 7 percent offered those accounts, and only 4 percent of employees participated. “No benefits manager worth their salt in any large employer will tell their boss that HSAs will take care of their problems,” says Chris Jennings, who was President Clinton's top health-care adviser and now advises corporations, consumer groups, local governments, and unions. </p>
<p>Employers are between a rock and a hard place, warns GE's Galvin. They need to provide health insurance in order to attract workers, but they have been unable to control their health-care costs. “I think large employers … are looking for new ideas and a creative exit strategy,” says Galvin, a leader in several organizations formed by the largest U.S. companies to propose solutions to the health-care cost crisis. “We're never going to get out of it entirely. Even in countries that don't do it our way, employers are paying, just through taxes. I think we're very willing and eager to get into a discussion about some kind of solution to the health-care problems.” </p>
<p>Exactly how serious the issue is for employers was underscored by the fact that just days after the election, the heads of the three top U.S. automakers came to Washington, D.C., begging for help from Bush and Congress on their catastrophic health costs. The auto industry hopes to find a more receptive ear in Congress now that Democratic legislators from key auto states like Ohio and Michigan are sitting on, or chairing, key committees. “Obviously having Mr. [John] Dingell [of Michigan] back as chairman [of the House Energy and Commerce Committee] helps a lot,” the UAW's Reuther says. Dingell's new committee chief of staff will be Dennis Fitzgibbons, who left the panel six years ago to work for an automaker, DaimlerChrysler. </p>
<p>Even as business gears up to shape the health-care debate, labor, consumer groups like AARP, and even health insurers, are mobilizing as well. Immediately after the election, America's Health Insurance Plans (AHIP), representing nearly 1,300 insurers, proposed a plan to insure everyone by helping them buy insurance with tax breaks and federal grants, and expanding government programs for the poor. Clearly, such a plan would benefit AHIP's members, and the organization said it will spend “significant resources” to buy advertising and have community events to discuss these proposals. AARP plans to keep up debate about health-care policies through forums, advertising, and community events, especially in states with early presidential primaries, says Rother. And organized labor shows no willingness to rest in its agitation for a national system. Says JoAnn Volk, a legislative representative for the AFL-CIO, “We're trying to be realistic about what can be accomplished in the next two years,” but the federation is hopeful it can “lay the groundwork for the debates that will come with the presidential election.” </p>
<p>As that debate evolves, there seems to be broad agreement on the need for universal insurance coverage. But there will be two main questions: How to get to universal coverage, and whether it will be provided through an efficient, less costly federal insurance plan or through a more costly multitude of private insurers who will demand huge profits. Senator Ted Kennedy of Massachusetts promises that access to affordable care will be a top issue for his Health, Education, Labor, and Pensions Committee. “The most straightforward way to see that every American has affordable, quality health care is to extend Medicare to all citizens,” he said. </p>
<p>Rather than vigorously leading the effort toward this Medicare-type insurance system, however, labor leaders seem to be shying away from insisting on it. “I think it's safe to say we have a policy in support of single payer,” says Volk, “but it is more important to us that we get to universal health care. We want to have a debate about the need for universal health care and will worry about how to do it at a later point.” Andrew Stern, president of the Service Employees International Union and the key force behind the Change to Win Federation formed by seven unions, sent a letter in July to CEOs of the Fortune 500 companies, asking them to join with labor to craft a replacement for employer-based health care, and noting that the federal employees health system, which offers an array of private insurance plans, was worth looking at. </p>
<p>The business community, however, seems to be showing new interest in government involvement with health insurance. A recent survey of 3,000 employers by the Commonwealth Fund and Center for Studying Health System Change found 51 percent interested or somewhat interested in allowing employees to participate in a public insurance program or the federally run private insurance program offered to Congress. Sixty-three percent thought it was important for the government to protect employers from catastrophic health costs. </p>
<p>Those numbers will only increase as the employer-based insurance system continues to crumble. In early 2006, Glen Barton, the retired CEO of Caterpillar and former head of the Business Roundtable's health-care task force, said the solution to the health-care crisis is a single-payer system, citing Medicare as a model. Giving testimony to a task force set up by the Illinois legislature and governor to develop a universal health-care plan for the state, Barton said that Medicare “works amazingly well in my opinion.” He proposed that employers and employees pay premiums directly to Medicare, “getting companies out of the health-care business.” He explained that the “only reason most companies are in this today is because they believe they can control health-care costs better than the insurers. With a single payer system, this should not be an issue.” </p>
<p>Barton's testimony is the first explicit call for a single-payer health-care system by a major American business leader. GE's Galvin does not reject it out of hand. “Where I step away from the Medicare-for-all is that today's Medicare is not something that makes sense to extend to everybody,” he says. But “a tomorrow's Medicare, where you could drive the values of information and incentives, and competition around quality and much more engagement by employees, having more price sensitivity, is one way to get there.”<br />
It is too soon to say whether any presidential candidate will be bold enough to press a Medicare-for-all proposal. But Democrats will be using their new leverage to press on health care, and at least two Republican presidential hopefuls -- former Massachusetts Governor Mitt Romney and Tommy Thompson, George W. Bush's former Health and Human Services secretary -- are best known for health-care initiatives. By 2008, with the employer-based insurance system continuing to crumble, an alliance of business and labor just might be strong enough to get things moving. </p>
<p><em><strong>Barbara T. Dreyfuss</strong> is a senior correspondent for </em>The American Prospect.</p>
</div></div></div>Mon, 18 Dec 2006 01:04:02 +0000145906 at http://www.prospect.orgBarbara DreyfussA Wedge in the Doorhttp://www.prospect.org/article/wedge-door
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>Millions of seniors will receive a rude surprise in the next two weeks when they open a mailing from the federal government explaining how the Medicare program will work in 2007. For the first time ever, beginning in January, what a senior pays for Medicare premiums will be linked to his or her income. This change was slipped into the Republican-drafted Medicare drug bill that leaders rammed through Congress in 2003, but it has been overshadowed by the myriad problems with the prescription-drug benefit.</p>
<p>The premium provision puts Medicare on a path to becoming a poverty program -- part of White House and Republican congressional efforts to eviscerate what has always been a universal entitlement. For many liberal defenders of the Medicare program, the idea of indexing Medicare to have the rich and more affluent pay more is tempting, and it seems in keeping with a progressive tax system. But it goes against the very reason that Medicare works well: The minute you start tying Medicare costs or benefits to income, you threaten to unravel the entire system by splitting it into haves and have-nots, eventually knocking the props out from the political support for Medicare itself. </p>
<p>There have been efforts to link Medicare to income for years, but the provisions that go into effect in January are a major new development. The premiums that will be tied to income pay for coverage of physician care. People choose whether to participate in the physician coverage, although they are automatically enrolled for Medicare's hospital benefits. Most seniors, rich and poor, sick and healthy, do enroll because it is a very good deal, with all elderly paying the same premium and receiving the same benefits. </p>
<p>But now that the barrier to tying premiums to income has been broken, it makes it much easier to keep ratcheting up the cost for some participants and the number of seniors who have to pay high rates. In short order many people could decide it is no longer worthwhile to buy into the voluntary benefit, leaving the program to poorer and sicker people, making the coverage much more costly to those that are in it and diminishing political support in general for Medicare. Furthermore, now that this step of linking premiums to income has been taken, Republicans who have been targeting Medicare overall will press harder for linking all Medicare co-payments, deductibles, and benefits to income as well. </p>
<p>Although the specific provisions that begin in January appear somewhat modest, it is clear that its architects see it as merely the first step. Currently all enrollees pay 25 percent of the premium cost for physician and other outpatient care and the government foots the remainder of the bill. But in 2007 individuals with income over $80,000 (double for couples) will pay more than this. How much more depends on their income, and their share will also increase over the next three years. But with this small initial step alone, by 2009 some people will pay 80 percent of cost, estimated at about $4,700 a year, more than triple what most others will pay. About 4 percent to 5 percent of beneficiaries are expected to initially pay higher premiums. </p>
<p>That this is just the beginning of an effort to shrink the program was made clear in remarks by Dr. Mark McClellan, who for the first two years of George W. Bush's administration served as the top White House health care official, then headed the Food and Drug Administration for two years before taking the helm of the Medicare program. McClellan, whose brother was White House spokesman, stepped down on October 14 as the administration's senior Medicare official. A week before his last day, McClellan met with reporters at the <em>Christian Science Monitor</em> and warned that policy-makers need to “take a close look at what Medicare can support for the long term.” Referencing the fact that in 2007 Medicare would be tying premiums to income, he said that “steps toward having people with the most means use their own savings and their own resources to pay for part of their care … can be a very important step toward making the program sustainable.” </p>
<p>Then on October 16, two days after leaving the Medicare agency, McClellan addressed a large conference of health care officials and business leaders in Washington, urging that means testing of Medicare premiums be expanded beyond provisions starting in January. (This would not cost the program political support, he argued.) And not only should the current charges for outpatient care premiums be increased, he stressed, charges to seniors for the drug program should also be indexed for income. “We need to start taking these steps now,” McClellan insisted. McClellan spoke as a senior fellow at a think tank, the AEI-Brookings Joint Center for Regulatory Studies, a forum he intends to use to press for broad health care changes. </p>
<p>Linking Medicare, its premiums, charges, or benefits to income is opposed by many Democrats because it undermines Medicare's universality. The next day, at the same conference where McClellan spoke, Representative Pete Stark, a Democrat from California who will head the important House Ways and Means health panel should the Democrats retake the House, criticized the proposals McClellan had endorsed. Stark warned that Medicare would be destroyed if “it loses its status as an entitlement.” Because it is a universal benefit, Stark explained, “everybody participates and they participate on a fair basis.” Linking premiums to income would cost it vital political support, he said. Stark added that if Democrats do win a majority in the House, they will hold oversight hearings on long-term financing of Medicare, with their main objective being to protect Medicare and Medicaid -- something the Republican-controlled Congress has clearly not tried to do.</p>
<p><em>Barbara T. Dreyfuss is a senior correspondent for</em> The American Prospect.</p>
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</div></div></div>Thu, 26 Oct 2006 06:10:38 +0000145806 at http://www.prospect.orgBarbara DreyfussInside Jobhttp://www.prospect.org/article/inside-job-0
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>Last week saw the news that Humana, one of the country's largest health insurance companies, experienced much better second-quarter earnings than had been expected. The announcement amounted to confirmation that the Medicare drug benefit is working exactly as planned -- not for the people enrolled in it, but for the insurers who drafted it.</p>
<p>Humana's profits jumped 10 percent, much better than Wall Street had anticipated, helped by a surge in seniors enrolling in Humana's Medicare drug and HMO plans. Membership in their drug program now stands at 3.46 million, up a million and a half in the last three months. This increase in enrollment brought Humana $801 million in new revenue. Humana has also doubled its Medicare HMO membership in the past year, bringing it to almost a million. The company took in $2.1 billion in premiums from HMO members in the last three months, almost double what the firm received a year ago. </p>
<p>Simply put, the Medicare drug program has been good news for Humana. But for seniors who had hoped that the Medicare drug plan, which began in January, would relieve them of worries about drug costs, things are not so rosy. About one-fifth of seniors in the Medicare program, concentrated especially among the poor who had been on Medicaid, report that they now pay <em>more</em> for their medicines than they had before. Since insurers can decide which drugs they cover and which they won't, many seniors are finding that new medicines they need are not paid for by their plan. And millions of enrollees are now approaching the level of total drug expenses that will provoke a cutoff from any further Medicare help with costs -- the now-infamous "donut hole." </p>
<p>The problems with the program stem from the original motives of the Medicare drug bill's architects. The goal was not to provide comprehensive and inexpensive protection for seniors. Rather, for the Republican congressional leaders that rammed it through Congress in 2003, it was a way to win votes in the 2004 and 2006 elections. Details of the program were only important if they helped assure its passage through Congress.</p>
<p>For the drug companies that spent millions to help enact it, the measure was a way to defuse growing support for drug import legislation. But they were adamant that the program not have price controls. </p>
<p>Meanwhile, for health insurers, who were going to run the program, the issues were more complicated. They hoped to make money in the Medicare drug program, so they wanted maximum freedom in determining what drugs they would cover. But they also wanted government help if new, high-priced medicines drove their costs up too much or they were saddled with too many sick enrollees. </p>
<p>Insurers had for years been strongly opposed to providing drug-only insurance to Medicare enrollees. Company executives and leaders of the Health Insurance Association of America repeatedly testified at Capitol Hill hearings that they would not offer such plans. They did not think companies could make much money on such insurance, and the risks were high. Startup costs would be huge; there would be risk of adverse selection in enrollment; and future drug products and their costs produced too many unknowns. </p>
<p>Because of such reluctance, Republican congressional leaders were determined to give insurers what they wanted to win their full support. Republicans were determined to base the program on free-market principles, with private sector insurers running it. Whatever the cost would be of guaranteeing insurers profits to lure them into the program, however much higher the overhead costs of private firms would be compared with government-run Medicare, whatever freedom insurers wanted to decide what drugs to cover -- all of it would be granted.</p>
<p>Work on drafting a Medicare drug bill based on private-sector plans began soon after Republicans won back control of the Senate in 2002. Since Republican control over the Senate was less secure than the House, congressional leaders decided to let the Senate go first in drafting a bill. Under the direction of Chairman Charles Grassley and two rogue Democrats willing to back a private-insurance plan, Senators John Breaux and Max Baucus, the Senate Finance Committee focused on forging a bill insurers would support. </p>
<p>To a degree rarely seen in Washington, the Senate staff called on insurers to help draft the plan. Lobbyists are often asked what they would like to see in a bill, and even write sections of them. But the collaboration with health insurers on the Medicare drug bill was of a different level altogether, as conversations with staff-level congressional participants attest. </p>
<p>Companies indicated they might offer the Medicare drug coverage only if they had the right subsidies, as well as government guarantees that their risks would be limited. But no one knew which exact mix of subsidies and guarantees would entice insurers into the program. So staffers crafted different models, providing various benefits to companies. The Congressional Budget Office did other models. Companies reviewed them to determine if they could make any money.</p>
<p>But senators were not merely going to take the word of Washington lobbyists that insurers would participate in the program. They wanted guarantees from “the company decision-makers” themselves (in a phrase used by one participant) that they would be an integral part of the push for the bill. Hill staff wanted to talk directly with insurance company CEOs, chief actuaries, and the heads of marketing. If these people signed off on the program, then Congress could enact a company-run benefit. </p>
<p>A handful of major companies had serious discussions with Hill staff. But those insurers that provided direct access to their top decision makers had more say in drafting the bill. “Certain companies had more hands-on discussion with policy makers. They made available their chief actuaries, which is a great service to the Hill,” said one participant in drafting the plan. Humana and PacifiCare (which later merged with UnitedHealth Group) were the most helpful, say those who were part of the effort. </p>
<p>Companies were most concerned that they be protected in the event that they enrolled too many sick seniors in their drug-only insurance plans. They were also worried that new, expensive drugs might soon be developed and raise their costs. So Senate staffers, working closely with Humana and PacifiCare, ended up providing companies with guarantees against extensive losses.</p>
<p>Most importantly, the government guaranteed it would cover plans' losses above certain levels. It would also pick up the majority of a patient's catastrophic drug costs. (The House version of the bill drafted after the Senate's only contained some of these provisions, but key government guarantees -- particularly against excessive risk -- only found in the Senate plan eventually made it into the final conference bill.)</p>
<p>Since the bill's passage, insurers have benefited further from how the Bush administration has implemented the program. For example, while the government is supposed to reclaim excess profits from companies, the administration has built in a profit margin for plans before they have to pay the government anything. Medicare also allows insurers to determine what drugs they cover (within categories) and to drop a drug from coverage virtually at will.</p>
<p>While these provisions were designed to make stand-alone drug coverage profitable, the Medicare drug program also features giveaways to insurers offering the drug benefit through HMOs. Most Medicare HMOs had long provided drug coverage, well before the law required it. And Medicare paid them less than it spent in the traditional system, since HMOs claimed to be more efficient. But, with insurers like Humana helping to write the drug bill, HMO payments were hiked substantially in both House and Senate plans. A congressional advisory panel estimated HMO payments jumped to at least 107 percent of average patient costs in the traditional program. </p>
<p>Humana executives devised a clever game plan for seniors. They would offer inexpensive drug-only coverage and then try to steer these enrollees into Humana's more profitable HMO. Humana's CEO, Michael McCallister, admitted to investors last October that it was offering the cheap drug plans as a way of “capturing as much market share as possible at a modest profit, to ultimately migrate those customers.” Humana enticed their sales representatives to sign up seniors for the HMO program with large commissions. In fact, salesmen were paid twice as much for HMO enrollees as they received for seniors signed up for drug-only plans.</p>
<p>Humana was not only involved in drafting the bill, they also had several former officials in top posts within the Bush administration as the program went into effect. The top Medicare official in charge of selling the program to seniors was Julie Goon, who had set up Humana's Washington office in 1990. When the bill was going through Congress, Goon was in charge of legislative affairs for the health insurance trade group, then named American Association of Health Plans. This June she became President Bush's senior health policy adviser. Goon replaced Roy Ramthun in that post. Ramthun was a top Humana official for eight years, including the time when Congress drafted and passed the Medicare bill. </p>
<p>Humana is optimistic that it will continue to benefit from the Medicare program. McCallister told analysts last week that the Medicare business was “a long-term growth engine” for the company. Indeed, Humana and UnitedHealth/PacifiCare together cover nearly half the seniors who have enrolled in drug plans.</p>
<p>But while insurers like Humana are reaping big benefits from the Medicare drug program's complex, wildly inefficient structure, many seniors haven't been so lucky. A coalition of consumer and labor groups is campaigning for significant changes to the program, and many Democrats and a few Republicans have introduced legislation to make the program work more in beneficiaries favor. Republicans may find that Medicare drug coverage is still an issue at the polls this November -- but not quite in the way they had hoped.</p>
<p><em>Barbara T. Dreyfuss is a senior correspondent for</em> The American Prospect.</p>
<p></p><center>* * *</center>
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</div></div></div>Fri, 11 Aug 2006 19:20:33 +0000145613 at http://www.prospect.orgBarbara DreyfussMedicare Woeshttp://www.prospect.org/article/medicare-woes
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>The Bush administration's Medicare drug plan, designed to specifications set by big insurers such as Humana and United Healthcare, is headed for more turmoil over the next year, and seniors will be the ones to suffer. Why? Because, while a handful of insurers and HMO's may be able to cash in on the program, by cornering enrollment or by drawing seniors into their managed-care programs, many health insurers are not likely to find the program the goldmine they had hoped. Industry consultants, Wall Street analysts, even conservative economists predict a major shakeout of plans, which will leave seniors bewildered and searching for new coverage. And some warn of premium hikes and reduced coverage by the plans that remain in the program.</p>
<p>From day one there have been widespread reports of seniors unable to fill prescriptions and of the poor and elderly being wrongly charged high prices for their medications as pharmacists, health plans, and Medicare officials try to figure out who is enrolled in which plan -- let alone what the provisions of that plan are supposed to be. And even as these problems surfaced, the stage was being set for many others.</p>
<p>The program's outrageously generous provisions for insurers sparked a land rush to enroll seniors. Administration officials laud the fact that there are dozens of health plans for people to chose. But in fact the level of plan competition and the low enrollment by seniors makes it very difficult for many plans to make money, keep premiums low, and have generous benefits. Economist Joseph Antos of the conservative American Enterprise Institute admitted in a February 9 article that “not all plans will survive,” and that high plan turnover will indeed be “disruptive to affected enrollees, particularly if the remaining options offer less generous benefits, have a more restrictive formulary, or require higher premiums than the exiting plan.” </p>
<p>Many smaller health plans will be “road kill,” in the words of John Gorman, a health plan consultant. Many remaining plans will raise premiums or cut back on drugs they cover to stay in the game.</p>
<p>There are two types of health plans in the Medicare drug program: those that are offering just drug coverage and those that provide it as part of an HMO, and both are running into significant problems. </p>
<p>First, there are just too many health plans trying to sign up seniors. Almost 90 organizations decided to provide stand-alone drug coverage, and each one offers several different options. Nationally, there are about 1,500 different plans. In most states, seniors have to choose from more than 40. In addition, in many areas of the country, seniors also have about an equal number of managed-care plans bewildering them.</p>
<p>Medicare chief Mark McClellan thinks this is the good news. He told the Senate Finance Committee on February 8 that this dizzying array of plans has kept prices down, and he said he has no intention of limiting those options. </p>
<p>Dan Mendelson, President of Avalere Health, sees it differently. Mendelson, a former Clinton administration budget official who founded the healthcare consulting company, says plans need certain enrollment levels to be profitable. “There are more plans than anyone anticipated,” he says, and this “reduces the number of people per plan … it makes it harder to spread your fixed costs.”</p>
<p>Also, plans decided to keep their premiums very low in order to attract customers. The average premium is only $37, and more than half of those insurers don't currently require seniors to pay any deductible. But when those premiums were set, the insurers did not know how many competitors they would have, nor how few enrollees there would be. </p>
<p>Many plans also sought out people eligible for both Medicaid and Medicare -- those termed “dual-eligibles'' -- because the government automatically assigned them to plans, which saved insurers marketing costs. But to qualify for these enrollees, health plans were required to charge below-average premiums. The problem, as Mendelson notes, is that these people often have very large drug costs. Still, insurers competed widely for these enrollees, and most states have about a dozen organizations splitting the enrollees. Here again, some plans will not get the critical mass of enrollees they need to be profitable.</p>
<p>All of this means that many health insurers will get out of the Medicare business or drastically reduce the number of plans they offer. AEI's Antos predicts “consolidation is inevitable in this market …” Health plan consultant Gorman agrees, noting, “There are going to be plenty of companies that don't meet numbers, and as a result, can't sustain the business long haul.” </p>
<p>Charles Boorady, a managed care analyst at Citigroup, believes that the “end state in three to five years will be an average of three to four companies offering three or four plan options each within a marketplace.” Boorady believes that a handful of large, efficient companies will end up dominating the program. “Companies that are not chosen by seniors will fold up their tents and go away.”</p>
<p>With all these plans competing for enrollees and with a very sluggish enrollment overall, plans that stay in the Medicare drug program are expected to raise premiums next year. The hikes could be enormous: Premiums could jump 24 percent to 42 percent, according to a study done by Mendelson's Avalere Health. If only 20 percent of those the administration expects to enroll on their own actually do so, premiums will jump a whopping 42 percent. If 60 percent enroll they would still go up 24 percent.</p>
<p>So far, enrollment lags way below administration predictions. In the first three months of enrollment (mid-November to mid-February), only 5.3 million people joined on their own despite extensive advertising and marketing by insurers and Medicare. The administration had predicted that by the end of 2006 there would be 29.1 million enrolled in the Medicare drug plan. But the latest figures released February 22 show only 15.8 million enrolled (not including those in employer plans with Medicare subsidies, but including those who were enrolled because they were on Medicaid or in HMOs). Enrollment for this year closes in two more months. </p>
<p>Seniors are also likely to find their plans cutting back on the drugs they cover. “I think there are a lot of reasons to think that things will tighten up a little in terms of formulary,” says Mendelson, “because a lot of plans did not anticipate how restrictive Medicare would allow their plans to be.”</p>
<p>Drug prices are already rising. A report released February 21 by Rep. Henry Waxman found that after only seven weeks of the program, ten top Medicare insurers have already hiked prices by more than 4 percent on a group of the ten most commonly prescribed drugs.</p>
<p>Gorman predicts even more problems for some of the smaller managed-care companies and those in less populated areas. “There are a lot of newbies in this business that are going to take a beating and are going to end up road kill, and that may happen sooner than people expect,” he said. “The first failures we will see are some of the start-up Medicare Advantage (HMO) plans in some of the more questionable markets.” Many have too little capital invested in their programs, are inadequately staffed, and have little expertise in providing care to seniors.</p>
<p>When the law creating the program passed two years ago, some doubted insurers would flock to it. But the Bush administration asked health plans what it would take to get them in the Medicare game. Officials from major insurers like Humana and United helped Medicare officials write the rules guaranteeing that they would have limited risk if they offered drug-only insurance. HMOs were also given huge pay hikes. Chip Kahn, now head of a hospital association but who used to head the Health Insurance Association of America, for years told Congress that insurers would not offer drug-only plans. He says they had been reluctant to participate because they “didn't think they'd ever get the level of support they did.” </p>
<p>Some insurers hope their drug-only plans will help steer patients into their HMOs, which are more profitable. They followed the lead of Humana, whose CEO told investors last October that its cheap drug plans were “about capturing as much market share as possible at a modest profit, to ultimately migrate those customers.” </p>
<p>Even Humana and other large managed-care players may ultimately rue the day they decided to make a foray into the Medicare business. Congress, concerned about enormous budget deficits, is likely to revisit its sweetheart deal with insurers. In fact, before the drug plan even went into effect last year the Republican-controlled Senate tried to chop $26 billion from future managed-care payments. Only a stealth lobbying effort with House and Senate Republican negotiators staved off the cuts. How long will HMOs keep them at bay? Insurers “have got to be nervous,” says Kahn.</p>
<p>The investment community certainly is. “Wall Street is concerned that the government will starve the goose that's laying the golden eggs,” says Citigroup's Boorady. In fact, stocks of managed-care companies heavily involved with Medicare are valued much lower by money managers than those that are not, he notes. </p>
<p>Plans leaving, confusion reigning, premiums jumping, benefits declining -- this is how the Medicare drug benefit Republicans designed is likely to play out. But it was only last summer, in a little noticed meeting on the Medicare drug benefit, that then-House Majority leader Tom DeLay exhorted 50 of Washington's top business lobbyists to encourage seniors to enroll in the drug program. This would be a boon to seniors who would in turn reward Republicans at the polls this November, he claimed. And once seniors trusted the GOP on Medicare, DeLay predicted, they might be more amenable to privatization of social security.</p>
<p>Just as DeLay's political clout has dissipated over the intervening months, so too have Republican hopes of benefiting from the drug benefit. It's telling that, with newspapers filled with horror stories the day the program started, Bush did not even mention it in his State of the Union address, let alone take credit for it. </p>
<p>By the time the November congressional elections roll around, seniors will have a good idea of how capricious, costly, and threadbare the private-sector drug benefit really is. Voters may grant DeLay his wish and reward Republicans accordingly at the polls.</p>
<p><i>Barbara T. Dreyfuss is a senior correspondent for</i> The American Prospect.</p>
</div></div></div>Wed, 22 Feb 2006 22:48:36 +0000145249 at http://www.prospect.orgBarbara DreyfussTax Breakuphttp://www.prospect.org/article/tax-breakup
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>Employers face new opposition in their efforts to rein in health-care spending, and it's not coming from the employees whom they are forcing to foot more of the bill. Instead, employers are at odds with their allies in the conservative think-tank world, who are mounting an all-out offensive to unravel the employer-based insurance system, which covers nearly 60 percent of Americans, by proposing to tax that benefit. </p>
<p>The rift between the conservatives and the employers surfaced recently after a report by a bipartisan advisory commission of academics, Wall Street insiders, and former members of Congress appointed by George W. Bush to recommend tax reforms. In November, that panel, after heavy lobbying by a coalition of right-wing activists, suggested that workers' health benefits be counted as income and proposed to cap the amount of insurance that could be offered tax-free. </p>
<p>The tax exclusion dates to an IRS ruling in 1943 that employees did not have to pay income taxes on the value of health benefits offered by employers. The decision sparked the growth of employer-provided benefits because it gave companies a way to attract scarce workers during the war when their options were limited by government wage controls. Today it is the backbone of employer-provided health benefits. The tax exemption of health benefits saved Americans $122 billion in taxes in 2004, consultants at the Lewin Group estimate; the average family saved $1,482.</p>
<p>The panel's recommendation was modest in scope. But even so, it represented the first high-level push for altering the tax-free status of health benefits since the Reagan administration. “We took some sacred cows and put them into public discussion,” boasts University of Southern California professor Elizabeth Garrett, a panel member.</p>
<p>The commission would have recommended total abolition of the tax break, claims Grace-Marie Turner, president of the conservative health- and tax-policy shop, the Galen Institute, which helped spark the proposal, “but said they felt there was too big an infrastructure built up to recommend that off the bat and that they would instead recommend a haircut.”</p>
<p>Both Turner and Daniel Mitchell, senior research fellow at The Heritage Foundation, worked hard to convince the panel and its staff to propose a limit on the tax exclusion. They organized 49 conservative groups, including the American Enterprise Institute, Heritage, the Cato Institute, the Pacific Research Institute, and the American Conservative Union, to back the plan. Members of this group spent hours with commission staff lambasting the tax exclusion and sent reams of paper to support their case. Several economists from the group testified at panel hearings.</p>
<p>There is little sign that either Congress or the president wants to spend much political capital right now on the panel's recommendations. But Turner vows that “we're going to do what we can to keep this issue front and center.” And later this year, Treasury Secretary John Snow is expected to recommend a set of changes to the tax code. The proposed cap could be among those, or it could surface in Congress as a budget proposal.</p>
<p></p><center> * * * </center>
<p>If and when the battle does start, the conservative think-tankers likely will be without their important natural ally: business. Employers were alarmed by the panel's proposal. National Association of Manufacturers (NAM) president John Engler called it “quite troubling.” Employer groups decried it in discussions with Capitol Hill staff. The health-insurance industry rushed to warn politicians that a tax on health benefits won't win them votes. The industry trade group, America's Health Insurance Plans (AHIP), released a survey of voters in the three early presidential primary states of Iowa, New Hampshire, and South Carolina showing that nine-tenths of respondents did not want health benefits taxed.</p>
<p>The proposal would cause employers administrative nightmares and create more uninsured, warns Steven Wojcik, vice president of public policy at the National Business Group on Health, which represents many Fortune 500 companies. Others fear a virtual collapse of the employer-based system. “Most of us enjoy the coverage house the tax code built so many years ago,” Neil Trautwein, assistant vice president of human resources policy at NAM, recently wrote in an e-mail to the employer and think-tank health-care community. “Damage or withdraw the twin supports (exclusion from employee income and deductibility for employers) and that house falls.” </p>
<p>But tearing down the employer-based system is exactly what conservative zealots want. They believe it is the fastest way to force individuals to spend their own money to directly purchase care or insurance and to understand its high costs. Immediately after the president's panel issued its report, a bevy of articles appeared on conservative Web sites saying the panel should have proposed a more dramatic plan. One, by Nina Owcharenko, a senior health-policy analyst at Heritage, called on Congress to use the opening offered by the tax panel to design an “alternative to employer-based coverage.”</p>
<p></p><center> * * * </center>
<p>The alternative they advocate is called consumer-directed health care. That pleasant-sounding moniker was devised to feed off public resentment at the restrictions HMOs impose on enrollees. Its hallmarks are high-deductible insurance plans and health savings accounts, which mean large, out-of-pocket spending by consumers if they get sick. Its philosophical basis is that risk should not be pooled but should be entirely individual. Its proponents argue that consumers must understand the cost of health care, and that by shopping wisely, consumers can lower prices. To protect against enormous costs, they say, people can buy catastrophic insurance coverage. </p>
<p>Supporters of consumer-directed health care claim that workers gorge themselves on the current health-insurance system, getting too much coverage and too much care -- not because they need it, but because insurers pay the bill. The third-party payment system is “absolutely the problem,” argues Galen's Turner. Heritage's Mitchell contends that people buy health care “in a way that it's like going to an all-you-can-eat restaurant.” </p>
<p>Congressman Pete Stark, the ranking Democrat on a key House health subcommittee, scoffs at the notion that ordinary people can know enough medicine to decide what care to buy. “Even the richest, most educated among us doesn't know a proctoscope from a horoscope,” Stark says. “There is no way of getting the market information necessary to make economically sound choices.” You can shop for shoes or cars, he argues, but people get medical tests or treatment only when told to do so by a doctor. “When we need the expensive stuff we are scared, we are in pain, we're confused,” he adds. “All the things that make for making bad choices.”</p>
<p>Employers are somewhere in the middle. While many have been working closely with the conservative think-tank world to create these new insurance structures, they are not ready to jettison the existing system. “We disagree with advocates who want to force change by the big negative stick of taxation of benefits,” Trautwein wrote in another e-mail. Far better, he argued, to allow the marketplace to evolve by not restricting “employers' design options.”</p>
<p>Trautwein told me that proponents of consumer-directed health care “really don't understand how the insurance market works.” By having a broad group of workers in an insurance plan, employers spread the risk of huge costs for sick or older workers over a large group of people. If the healthy could drop the employer-coverage, leaving in it only the more costly workers, “you have risk selection problems,” he warns, “and employer plans crash and burn.”</p>
<p>Even unions like the United Automobile Workers (UAW), which has long advocated a single-payer health-care system, argue that employer-based insurance is an efficient mechanism for pooling risk. Advocates of consumer-directed health care, says Alan Reuther, the UAW's legislative director, “are really hostile to the notion of pooling risk. They think that individuals ought to bear their own risk, that it's somehow wrong for healthy people to subsidize sicker people.” </p>
<p>But since conservatives are having a hard time openly selling companies on this, they try to cajole them into accepting a tax cap as a way of saving money. Turner tells employers they can say to their employees, “Let's work together to stay under that cap.”<br />
Trautwein responds that it is not just a question of cutting expenses today. Employers have a longer-term interest in having a healthy workforce. “A lot of our members are rediscovering a link between health status and productivity and safety in the workforce,” he says. Employers understand that it costs them money when workers are out sick or work without getting needed physical or mental care and are unfocused. </p>
<p>Business leaders have another fear: If employer-based coverage is rapidly overturned, and many employees lose coverage, there will be an outcry for national health insurance. “If we can't get the private sector to work, to adequately cover the bulk of the population … then the drum beat increases for national health care,” warns Trautwein.</p>
<p>Stark, a supporter of universal health care, agrees. He issued a wry press release thanking the panel for its proposal because, he says, the collapse of employer-based insurance would “push us toward universal health care. … You will not see us politicians sitting around and letting people go bankrupt.”</p>
<p>Hopefully it will not take the demise of the current insurance system, and the resulting pain this would cause, for that to happen. The auto industry is already feeling out Capitol Hill about government help in paying retiree health costs. Health care -- how to cover the 45 million uninsured and how to maintain it for others -- is expected to be an issue in the 2006 elections. Shoring up employer-provided health insurance, rather than taxing it to death, could be the line in the sand Democrats draw as they define a more comprehensive policy solution.</p>
<p><i>Barbara T. Dreyfuss is a freelance writer in Alexandria, Virginia.</i></p>
</div></div></div>Mon, 19 Dec 2005 04:40:45 +0000145109 at http://www.prospect.orgBarbara DreyfussDéjà Fluhttp://www.prospect.org/article/d%C3%A9j%C3%A0-flu
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>
Once again the country is facing a flu vaccine shortage, but it has gotten little attention from the Bush administration. Health care facilities, schools, and supermarkets are canceling flu vaccine clinics in Arizona, California, Texas, New York, D.C., and elsewhere. As Hillary Clinton noted on November 10, the American Lung Association's <a href="http://www.flucliniclocator.org/">Flu Clinic Locator</a> Web site has been rendered almost useless because so many clinics have been canceled around the country.</p>
<p>Last week administration officials started downplaying the shortage and assuring people that there will be adequate supplies eventually. Centers for Disease Control Director Julie Gerberding claimed the shortage would be temporary; she said it may in part have been triggered by greater demand this year than last, but admitted she had no data to support that. Gerberding announced that 71 million doses had been distributed as of November 10, with a total of 81 million expected by the end of November. The good news, she said, is that so far there have been relatively few flu outbreaks this season.</p>
<p>Officials acknowledge that the current shortage may be partly caused by troubles at the same Chiron Corporation plant that triggered last year's flu vaccine crisis, noting that “providers and distributors who ordered from Chiron will receive substantially less vaccine than they had ordered.” Major manufacturing problems still plague the facility,<br />
which was shut down by British health officials last October after they found serious production problems and contaminated vaccine.</p>
<p>British regulators reopened the plant in March, and in April the company predicted it would manufacture 25 million to 30 million doses of vaccine this year. But in June it lowered this estimate to between 18 million and 26 million doses. On October 17 the company admitted that production would be much lower than 18 million doses, but would not give a more specific estimate.</p>
<p>The manufacturing problems that triggered last year's shutdown of the plant were known to FDA officials at least as far back as 2003, when the FDA inspected the facility. If the FDA had forced changes at the plant back then, it might have been ready for full production this flu season.</p>
<p>But the FDA didn't force Chiron to correct its problems in 2003 because its oversight powers had been <a href="http://www.prospect.org/web/page.ww?section=root&amp;name=ViewWeb&amp;articleId=8821">seriously weakened</a> by the FDA's then–chief counsel, Daniel Troy. Before coming to the FDA, Troy, the first political appointee to hold that post, had spent years suing the agency in an effort to curb its authority. </p>
<p>One of the first actions Troy took after becoming the FDA's top lawyer in August 2001 was to require that key issues regarding oversight of manufacturing facilities be channeled through his office. That meant that any warning letters, threats of legal action against companies that did not fix problems, had to be cleared by Troy. When FDA inspectors found unsafe drugs and wanted to seize them, Troy's office would decide whether or not they could.</p>
<p>A report earlier this year by Representative Henry Waxman shows that once Troy began to exert control over the FDA's manufacturing oversight, official FDA policing actions decreased markedly. Between 1999 and 2001, the FDA took action against 36 companies making biological products such as vaccines; in the next three years, it acted against only six firms.</p>
<p>FDA inspectors and those who enforce compliance with FDA rules became very demoralized by Troy's policies. “People work in an agency like the FDA not because they are going to make a lot of money but because they think they can make a difference,” says William Hubbard, who retired earlier this year from his position as Associate Commissioner for Policy and Planning after 32 years at FDA. “So when a public health problem comes up they are going to look at what solutions we have, what's our tool box. If using that full toolbox is viewed as too much power, well, that is demoralizing, insulting, and saying to people you can't solve the problem. And if you can't solve the problem, why be here?”</p>
<p>Officials who had spent months preparing to take companies to court to force them to meet standards and obey requirements were told they could not take action, FDA veterans say. Troy's office would call FDA compliance officials and tell them to withdraw a proposed action against a company because it was not going to be approved. “A lot less got submitted as warning letters because they knew they would get that review and a lot less got approved after they were submitted,” says a former inspector. “It definitely had a chilling effect.”</p>
<p>When FDA inspectors did a routine inspection of Chiron's flu vaccine plant in 2003, they found significant manufacturing problems that could affect the quality and sterility of products which required immediate correction. These problems were definitely related to the contamination found a year later, former FDA officials say, and were serious enough that the resulting contamination should not have been a surprise. </p>
<p>But when the inspectors wanted to issue a warning letter to the company, an action that would have told the company it urgently needed to correct problems or face the prospect of the FDA shutting down all manufacturing at the plant and seizing any existing product, they were not allowed to do so. Such a warning would have required not only immediate corrective action by the company, but another FDA inspection in a year to make sure the problems had been resolved.</p>
<p>Instead, senior officials at headquarters decided not to take official action. The company was told it could handle corrections on a voluntary basis, and an FDA inspection was not scheduled for two years.</p>
<p>It appears that Troy's office wasn't officially consulted on whether to issue a warning letter in this case; the decision was made lower down the line. But with his views on regulatory action clear, he did not need to be directly involved, say former officials involved with this issue. He had already decimated FDA oversight.</p>
<p><i>Barbara T. Dreyfuss is a freelance writer in Alexandria, VA.</i></p>
</div></div></div>Mon, 14 Nov 2005 22:03:46 +0000145018 at http://www.prospect.orgBarbara DreyfussEagle-Eyed Regulatorshttp://www.prospect.org/article/eagle-eyed-regulators
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>
A two-year battle ended last week in a major defeat for deregulators when Congress overruled a controversial Food and Drug Administration (FDA) decision.</p>
<p>Two years ago Daniel Troy, the first political appointee to become the agency's top lawyer, stripped the FDA of its ability to regulate cosmetic contact lenses. That action set Troy against the medical profession, manufacturers -- and the FDA's own scientists.</p>
<p>Troy's decision caused an uproar at the FDA. “Agency officials were very upset, very demoralized about what happened,” one former top official says. “Some almost quit.”</p>
<p>But on Wednesday, October 26, the House followed the Senate's lead and unanimously passed a bill reasserting the FDA's oversight over decorative contact lenses. </p>
<p>Troy, who left the agency last December amid much controversy, was one of the most outspoken of the anti-regulatory ideologues given top regulatory posts at the FDA over the past five years. Troy came to the agency from private law practice, where he had spent years suing the FDA in an effort to curb its authority. He set in motion the contact-lens battle soon after coming to the agency in August 2001. The fight that ensued typified many similar battles throughout this administration that have pitted political appointees and their agency co-thinkers against career staff supporting a strong FDA. These conflicts have left the agency weakened and shell-shocked. </p>
<p>The result has been years of headlines warning that senior FDA officials knowingly allowed dangerous drugs to remain on the market, suppressed warnings by agency scientists of problems, approved products with little benefit, and refused to force companies to correct major manufacturing problems. Congress, despite hearings confirming widespread problems at the top of the FDA, has done nothing. However, the decision to reassert agency authority over cosmetic lenses, albeit after hundreds of injuries, at least offers a glimmer of hope. </p>
<p>Decorative lenses have been marketed for decades to actors needing to change their eye color or to patients with facial disfigurements. The FDA regulated them as it did lenses to correct vision (as medical devices), oversaw their safety and manufacturing, and required that they be obtained only through prescription from an eye-care professional.</p>
<p>However, over the last several years they have become easily available on the Internet; sold at flea markets, beauty parlors, even gas stations; and marketed to teenagers who wanted to change eye color or use them as part of a Halloween costume. </p>
<p>Significant injuries started surfacing. Members of the Georgia Board of Optometry found almost 800 patients hurt by the lenses over a two-year period. In 2002, summer fun at Myrtle Beach, South Carolina, was marred by news reports of injuries to people who had bought costume lenses from beachwear stores. Dr. Thomas L. Steinemann at MetroHealth Medical Center in Cleveland wrote a chilling medical-journal article on 17 cases of major eye infection, four landing patients in the hospital and one resulting in a corneal transplant to a 14-year-old.</p>
<p>But while FDA scientists were looking at ways to crack down on illegal use of the products, Daniel Troy had other ideas. He saw the cosmetic-lens issue as not only a chance to deregulate a product but as a way to make a broader statement about FDA power. And many FDA career staff feared he wanted to set the stage for deregulating other products.</p>
<p>In June 2002 he circulated a proposal to officials at the FDA's Center for Devices proposing that the lenses be regulated as cosmetics rather than medical devices. Troy argued that, because the lenses were not meant to correct vision problems, they were decorative and should be considered cosmetics. The change would mean that the FDA could not require that they be sold only through prescription and would be virtually powerless to stop sales in such places as flea markets. It would also limit the agency's ability to oversee the safety of the product itself. </p>
<p>The general counsel's position overturned the long-standing FDA view that if a product affects the body, regardless of its intended use, it is a device. “He believed it was not the device itself but the claims made for the device that determined how it was regulated,” says Wally Pellerite, who was a top compliance officer at the device center for 21 years.</p>
<p>FDA scientists feared Troy's stance could be used to drastically erode the agency's regulation of many other products, such as breast implants and collagen injections, if a company claimed it wanted to sell these only for cosmetic purposes</p>
<p>Troy's actions were undergirded by a philosophical disdain for strong government oversight of industry, a belief widely shared by the political appointees at the FDA but perhaps most directly articulated by Troy himself. He considers himself an “originalist” in the tradition of his mentor Judge Robert Bork, whose Supreme Court nomination was blocked by Democrats in 1987. (Originalists argue for a literal reading of the U.S. Constitution to comport with their interpretation of the views of the Founding Fathers, rather than applying it flexibly to changing times.)</p>
<p>This is in sharp contrast to long-held policy at the FDA, where officials had always taken the view that they had a broad mandate to correct food or health problems. Mary Pendergast, the agency's deputy commissioner from 1990 to 1998, says that when she was at the FDA, “We kept saying that the Food, Drug and Cosmetic Act is the Constitution, and we would read it broadly.” But, she adds, “It seems that Troy thought that if it isn't specifically authorized in the act, then he was not inclined to do it.”</p>
<p>Even as the FDA's chief counsel, Troy co-authored a paper with Bork arguing that the government does not have the right to oversee industry. They maintained that the Constitution's commerce clause does not give Congress the power to regulate manufacturers, only to oversee trade. Such a view “would eliminate most of the FDA's work,” says George Washington University law professor Peter J. Smith. “Most of the regulatory state would be eviscerated.” </p>
<p>Medical personnel, especially optometrists and ophthalmologists, were equally outraged, fearing many injuries if people used lenses without a doctor's care. Manufacturers, too, were concerned, fearing their products would be blamed for the growing number of injuries. And many had already gone through the regulatory process and wanted new companies to compete on a level playing field. Democratic Representative Henry Waxman wrote then-Health and Human Services Secretary Tommy Thompson in August 2002 about Troy's plan, urging him to stop it.</p>
<p>Faced with tremendous dissension throughout the FDA, the medical community, Congress, and manufacturers, Troy wanted the imprimatur of the commissioner, at the time former White House insider Mark McClellan, on this change. The commissioner's office forced the policy on career staff. </p>
<p>By late 2002, Troy was advising a British manufacturer on how to market the product as a cosmetic, even while Thompson was assuring Waxman that the FDA had no intention of changing agency requirements on cosmetic lenses. </p>
<p>The new FDA policy was publicly signaled by a statement from Troy's office on April 1, 2003. Infections and other medical problems continued. Steinemann says his hospital has seen dozens of injured teens. The American Academy of Ophthalmologists and the American Optometric Association, along with U.S. manufacturers, has lobbied hard on Capitol Hill. More than two years later Congress finally reasserted stronger FDA oversight, at least on this issue. </p>
<p><i>Barbara T. Dreyfuss is a freelance writer based in Alexandria, Virginia.</i></p>
</div></div></div>Wed, 02 Nov 2005 18:16:05 +0000144990 at http://www.prospect.orgBarbara DreyfussOverbilledhttp://www.prospect.org/article/overbilled
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>On Tuesday, September 20, while pharmaceutical lobbyists in Washington were busy peddling influence in the halls of Congress, the Council of the District of Columbia was passing a groundbreaking law restricting drug-company pricing. By unanimous vote, the council declared that selling patented drugs at “excessive prices” was illegal. It defined “excessive” as anything more than 30 percent over the price of the same drug in Germany, Canada, Australia, or the United Kingdom. The law allows the D.C. government -- or any city resident -- to force a drug company to prove to a court that its development and marketing costs and profits justify U.S. prices way above those charged abroad. </p>
<p>The council's action is the most direct effort to date by a state or local government to force drug companies to prove that they are not price gouging.</p>
<p>While a firestorm is raging in the states and cities against high drug prices, most lawmakers have concentrated on purchasing strategies -- such as importing drugs from Canada, or banding together to buy in bulk -- to get lower prices. The District of Columbia, like so many states and towns, had linked consumers with Canadian Internet pharmacies. </p>
<p>But Councilman David Catania, who drafted the new law, rejected such limited solutions and decided to focus directly on pricing. Only a few states have laws addressing pricing, especially to consumers. The few that do are complex, difficult to implement, and are not explicit about what prices would be acceptable.</p>
<p>Catania believes the D.C. law slipped under the drug industry's radar because the industry is so focused on defeating a November ballot initiative in California that would prevent drug companies from “profiteering” on drug prices. It has spent tens of millions of dollars to block the measure. While passage of the initiative in a state as large as California might have more impact than action in D.C., the drug industry is not likely to allow this dangerous precedent to go unchallenged.</p>
<p>Washington Mayor Anthony Williams has indicated that he will sign the bill, but it still has to get the OK of congressional committees. The drug industry successfully rallied congressional opposition this past summer when Catania was <a href="http://www.prospect.org/web/view-web.ww?id=9237">moving another bill</a> to lower drug prices through the council. </p>
<p>Usually the committees overseeing the district do not interfere in its home rule, even when the council passes laws they oppose. But the legislators heading D.C. oversight panels, Representative Tom Davis and Senator George Voinovich, warned Catania in June that they had serous concerns about his earlier proposal. That legislation would have taken away a company's right to manufacture a product if its price was too high and given manufacturing rights to another firm that agreed to sell more cheaply.</p>
<p>Catania decided to try the simpler approach of allowing lawsuits against “excessive pricing” on the basis that the council is authorized to protect the health and welfare of citizens and protect them against unfair trade practices. </p>
<p>But he expects that, “like the tobacco industry, the drug industry will insist on litigating this because it's cheaper to litigate than live with it.” A spokesman for the Pharmaceutical Research and Manufacturers of America (PhRMA) refused to say whether his organization will challenge the law in court or try to get Congress to reject it. Instead, spokesman Ken Johnson warned that linking prices to those in other nations would “stifle supply and smother innovation.” He added that the money from drug sales also goes to fund assistance programs for the poor, noting that 7,200 district residents were helped this year. </p>
<p>Limiting prices to no more than 30 percent above those in key industrial countries would have a significant impact on consumer bills. A study Catania's office did of U.S. prices for 15 of the 20 best-selling drugs -- including Lipitor, Zoloft, Nexium, Singulair, and Norvasc -- concluded that only two were not at least 30 percent above the average price in England, Australia, Germany, and Canada. Another study, published September 19 in the <i>Annals of Internal Medicine</i>, compared the prices of 44 of the most frequently bought drugs from Canadian Internet pharmacies with three U.S. online retailers (Walgreens, CVS, and Rite Aid). It concluded that many sell for almost 50-percent less in Canada. Buying from Canadian pharmacies meant a mean savings of 24 percent, concluded researchers, who added that this understated the savings: If Canadian Internet pharmacy sales were compared with local retail pharmacies in the United States, rather than U.S. online sales, the savings would be an additional 10 percent to 15 percent. </p>
<p>State legislators are closely watching what is happening in the District of Columbia, and Catania expects bills to be introduced soon in several states. He will discuss his legislation at the October meeting of the National Legislative Association on Prescription Drug Prices, comprising legislators from 10 states and the District of Columbia who meet to discuss strategies for lowering drug costs. Sharon Treat, executive director of the group and formerly Maine's Senate majority leader, says that she, too, has talked to many legislators, both in and outside of her group, and that there is a lot of interest. But, she notes, many will wait to see if PhRMA sues and what the courts do, which is why PhRMA is likely to go to court. </p>
<p>Still, having “50 states, D.C., and Guam pass separate legislation is not a long-term solution,” she admits. Congress must act. But with Congress in Republican hands, only strong state and local activity will force any attention on the Hill. Only because numerous states and cities, many controlled by Republicans, took steps to help consumers illegally import drugs from Canadian pharmacies has there been intense activity in congress to make this legal.</p>
<p>Perhaps the District of Columbia's law will eventually mean lower prices for its residents. In the meantime, Treat sees it as an important step in “pushing policy-makers in Washington.”</p>
<p><i>Barbara T. Dreyfuss is a freelance writer based in the Washington, D.C. area.<br /></i></p>
</div></div></div>Wed, 28 Sep 2005 11:59:02 +0000144886 at http://www.prospect.orgBarbara DreyfussSwept Awayhttp://www.prospect.org/article/swept-away
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>
Hundreds of thousands of displaced Gulf Coast residents are finding themselves in a health-insurance crisis. While those injured, sick, or chronically in need of health-care services are finally gaining access to emergency medical services at shelters or in the towns and cities to which they have been evacuated, their ability to continue getting needed care is made very difficult and put at risk because the United States does not have a national health insurance system.</p>
<p>Paying for and keeping health insurance coverage is difficult, even in the best of times. Health-insurance premiums are unaffordable for many people, especially if they are unemployed, self-employed, or if their employer does not offer coverage. People losing jobs suddenly lose insurance; those changing jobs often lose coverage if their new employer doesn't provide it. State requirements to enroll in Medicaid are often so severe that many poor or disabled can't meet them. And even those on Medicaid often find that the program's payments to doctors are so low many providers won't treat them.</p>
<p>Now Hurricane Katrina's displacement of hundreds of thousands of people has made health-insurance coverage even more of a crisis for people along the Gulf Coast, especially in Louisiana. Medicaid enrollees have lost their paperwork, computers are down, and people cannot prove they had coverage. Others, suddenly unemployed or those without insurance, want to apply for Medicaid in the new state in which they suddenly find themselves. But Medicaid rules are different in each state, and federal support for it differs from place to place. States are unsure which rules should apply for evacuees or who will pay for them, their home state, their new state, or the federal government. </p>
<p>For those displaced hurricane victims who have insurance, many are barely able to pay for food and housing, let alone manage insurance premiums. And even if they can, those in HMOs or PPOs and required to use specific doctors or hospitals will not be able to do so for some time.</p>
<p>Existing problems are likely to be exacerbated if more people lose coverage over the next few months because employers in Louisiana go out of business, or if evacuees find that they cannot return home to work. Many elderly people are expected to seek nursing-home care as they find that the family and friends they had relied on for help can no longer provide it. </p>
<p>Health-care coverage in Louisiana, one of the poorest states, was already fragile before the hurricane hit. It had the third-highest rate of uninsured in the nation, with 22 percent of all residents under 65 lacking coverage. For the poor, defined as those under 200 percent of the federal poverty line, more than one-third had no coverage.</p>
<p>For the rest of the poor, Medicaid helped pay for health care, at least for children. Almost 20 percent of the non-elderly in the state were enrolled in Medicaid, and most were children whose parents didn't qualify themselves. Fifteen percent were disabled. The state's Medicaid payments to doctors were so low, however, that it was hard for many enrollees to find providers willing to treat them. The rest of the state's residents had private insurance, although for many it was a strain to keep up payments.</p>
<p>Then the hurricane hit. Two-thirds of the state's Medicaid enrollees were in parishes hard hit by the hurricane and floods and are now scattered throughout the country. Lost in the floodwaters are any records of their Medicaid enrollment or eligibility documents. States around the country -- especially Texas, where about 200,000 victims fled -- are struggling to provide health-care services and are warning that they can't continue to do so without federal money. </p>
<p>When reports surfaced that the Bush administration was going to ask Texas to absorb the added costs of caring for the hurricane evacuees, Texas Governor Rick Perry hurriedly sent off a letter to Washington threatening drastic delays in caring for Louisiana Medicaid enrollees unless the federal government agreed to pick up the total tab for care. Otherwise, he said, Texas would have to access Louisiana enrollment files and enroll Texas physicians and hospitals into Louisiana's Medicaid program before giving people needed services, something that is currently virtually impossible.</p>
<p>The National Association of State Medicaid Directors fired off a letter to federal Medicaid officials September 2 urging them to put hurricane victims into a unique category of eligibility to allow them to immediately enroll in any state for coverage and for the state to get completely reimbursed by the federal government. The group's vice chair, Ohio Medicaid Director Barbara Edwards, warned Friday that states need quick answers to their many questions about providing Medicaid help to evacuees. </p>
<p>Congress and the administration have been scrambling to give answers, but thus far the Medicaid directors' association says it has not seen anything concrete. Dr. Mark McClellan, head of Centers for Medicaid and Medicare, said last week that he was working on developing one single form that all states could use to have evacuees apply for emergency Medicaid coverage, with or without documentation of their income. On Monday, Senate Majority Leader Bill Frist said that the administration would soon announce help for Texas, and Senator Kay Bailey Hutchison said that she would introduce a Medicaid reimbursement bill authorizing the federal government to pay 100 percent of Medicaid coverage for evacuees for six months. Republican and Democratic Senate Finance Committee leaders indicated that they would introduce a bill to provide federal payment for all states providing Medicaid coverage to evacuees. </p>
<p>At the same time, dozens of private health insurers are suspending rules -- sometimes for a month, sometimes longer -- requiring that their enrollees use certain health-care providers. They are also giving people extra months to come up with payments for their insurance policies. But how long this largesse will last is questionable; very likely it will not be as long as many of the hurricane's victims will need it.</p>
<p>All this would be unnecessary if we, like virtually every industrialized nation, had a national health-insurance program. Such a program -- a universal Medicare plan, for example -- could provide everyone with the same coverage, regardless of where they live (or have to live in an emergency). And it would mean that people who lost their paperwork in a flood, fire, or other catastrophe would never have to worry that their coverage would disappear with it.</p>
<p><i>Barbara T. Dreyfuss is a freelance writer based in the Washington, D.C. area.</i></p>
</div></div></div>Thu, 15 Sep 2005 12:28:58 +0000144835 at http://www.prospect.orgBarbara DreyfussPatents Pendinghttp://www.prospect.org/article/patents-pending
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>Unless the drug industry starts to negotiate significantly lower prices, it may find itself battling debt-strapped states for control over the manufacture of drugs. States already take land and other property in order to benefit the public by building things such as roads and schools. Now some legislators and officials are saying they should be able to take away a drug company's intellectual property, its patent. They want to give these patents, which allow a company to manufacture a product, to competitors that agree to sell the drugs to the states at much lower prices. </p>
<p>Patents are the key to huge drug-company profits. The industry will fight vociferously to protect them. In West Virginia, where the issue came up last summer, industry lawyers warned a legislative advisory council away from proposing such action on patents, claiming it would be unconstitutional. With virtually unlimited resources, the drug companies could drag states through courts for years. Still, the specter of states compelling companies to license their patents to other firms terrifies the industry. And even the fight to do this would open the industry to further scrutiny on pricing policy. All of which, some officials hope, could make drug companies more willing to negotiate discounts. </p>
<p>That's what District of Columbia Councilman David Catania hopes will happen. Catania, a Republican who recently registered as independent after breaking with President Bush over the same-sex-marriage issue, introduced a compulsory license bill February 1. It authorizes Washington, D.C.'s mayor to declare a health emergency and, under eminent domain authority, issue a compulsory license to a generic firm to produce select patented drugs. </p>
<p>Under eminent domain requirements, the patented drug company would be given “just compensation” for the patent. The councilman argues that if drug companies were smart, they would “start talking about price reductions now rather than leave themselves open to a long, drawn-out due process review and hearings to determine just compensation.” Such review and hearings, he warns, would expose “just how pervasive the price gouging and profiteering has been.” </p>
<p>That's precisely what happened when the Bush administration's former health and human services secretary, Tommy Thompson, wanted to pressure the Bayer Corporation to give the government better discounts on its antibiotic Cipro during the anthrax scare. Thompson started threatening to have generic companies make Cipro if Bayer wouldn't offer the government better pricing. Bayer immediately gave the government dramatic price discounts. Thompson acted after the Canadian government said it would override the patent and contracted with a generic company, Apotex Inc., to make Cipro.<br />
Catania, who chairs the District's health committee, plans hearings March 22 with Washington health-care leaders, AARP, drug-company representatives, and a key legal architect of the bill, West Virginia University law professor Kevin Outterson.<br />
Outterson argues that states (the District of Columbia has all the legal powers of a state, notes Catania) derive the legal authority to have a company manufacture a patented product owned by another firm from two sources. First, states already take property for building roads and government sites under eminent domain powers, and could extend those powers to intellectual property, such as drug patents. Second, in a 1999 U.S. Supreme Court opinion (<i>Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank</i>), the Court said that a state's infringement of a patent, for a public purpose, is not by itself unconstitutional, so long as the state compensates the patent owner for the loss of the patent. To meet the public purpose clause of the Court's ruling, Outterson proposes that states only break a patent to make drugs for public employees and Medicaid enrollees. </p>
<p>Outterson explained his ideas in late January at a meeting of the National Legislative Association on Prescription Drug Prices, a group of senior legislative leaders of eight Northeast states, Hawaii, and the District of Columbia. Outterson told them he knows of two states where legislators are drafting bills based on his proposal, and at the meeting Vermont legislators publicly indicated interest in doing so. </p>
<p>Catania says he doesn't know if this bill “will be the silver bullet that brings sanity to pricing pharmaceuticals in the District,” but he believes states will be watching closely to see what happens with this “very new, fresh approach.” While the idea of a state seizing drug-patent rights and giving them to a generic manufacturer may seem extreme, remember that a growing number of state leaders, both Republican and Democratic, are already advocating illegal action, namely importing drugs from Canada, in a desperate attempt to get lower priced drugs. </p>
<p>States have always been a laboratory for innovative policies. Given the tremendous budgetary and constituent pressure on legislators to do something on drug costs,<br />
patent pending may take on new meaning. </p>
<p><i>Barbara T. Dreyfuss is a freelance writer in the Washington, D.C. area.</i></p>
</div></div></div>Wed, 23 Feb 2005 21:41:52 +0000144317 at http://www.prospect.orgBarbara DreyfussA Dirty Jobhttp://www.prospect.org/article/dirty-job
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>After creating record federal budget deficits by giving tax cuts to the wealthy and financing the war in Iraq, the Bush administration's budget proposal in February is widely expected to try to shrink deficits largely by slashing programs for the poor and the elderly, particularly Medicaid. Capitol Hill is expecting the administration's fiscal 2006 budget to include drastic cuts in federal Medicaid spending, offering states more flexibility in deciding what Medicaid will cover and who can enroll, in exchange for caps on federal money. And to help implement this the White House has just installed former Utah Governor Mike Leavitt as the new secretary of health and human services. </p>
<p>Supporters of a strong Medicaid program look with alarm at Leavitt's track record as Utah governor. In 2003, he welcomed the administration's “Medicaid modernization” plan to offer some up-front money in exchange for caps down the road. And, ominously, Leavitt was the first governor to get federal permission to cut benefits and raise co-payments for existing Medicaid enrollees, in order to finance very limited benefits for expanded populations.</p>
<p>Leavitt, who was confirmed January 26 by the Senate, sidestepped questions at his confirmation hearings by worried senators, primarily Democrats but including Republicans such as Maine's Olympia Snowe, about whether he would back limits on Medicaid spending. Instead, he referenced what he did in Utah, insisting, “It's always been my belief that we can expand the number of people that we serve with the available resources.”</p>
<p>And if that means, as it has in Utah, cuts in what are called optional benefits, so be it. “Mandatory populations should remain mandatory.” he told senators. “Optional coverage should remain optional.” Mandatory coverage is what is required under federal law, optional coverage means additional benefits or people the individual states decide to cover. What Leavitt didn't mention was that optional benefits have become, in fact, a major part of Medicaid coverage. The Urban Institute estimated that in 1998, two-thirds of Medicaid spending was “optional” and almost 12 million out of 40 million beneficiaries received care on an optional basis.</p>
<p>Medicaid plays a critical role in providing health care for the old and the poor. It pays for about half of all nursing-home costs for the elderly, provides health insurance for about half of those living with AIDS, and covers about 25 percent of all children in the country. It has also provided a critical safety net for workers who either don't get health insurance on the job or have lost it due to employer cutbacks, job changes, or unemployment. A new study by the Urban Institute's John Holahan concluded that the jump in Medicaid costs by one-third between 2000 and 2003 was due largely to increased enrollment of children and their parents who had lost employment-related health coverage or had otherwise hit hard times. Federal and state spending on Medicaid is now neck and neck with total federal Medicare outlays.</p>
<p>Over the years, states have tried creative ways to cover more people under Medicaid, enrolling beneficiaries in lower-cost managed-care plans, pressing drug companies for lower-cost drugs, and using tobacco settlement dollars for programs.</p>
<p>But in 2001, the Bush administration offered the states a chance to dramatically restructure Medicaid. It announced it would grant states permission (or waivers from federal standards) to deviate from Medicaid coverage and co-payment and enrollment rules, saying that this money would be used to expand coverage to new populations. The administration promoted the waivers and promised to expedite their approval.</p>
<p>California and Arizona jumped at the offer, but proposed to cover uninsured parents through funds that were unused and would otherwise go back to the federal government.</p>
<p>Utah however, under Governor Leavitt, proposed eliminating some benefits and adding new cost sharing for parents already enrolled in Medicaid to finance a very limited benefit for some new enrollees. Utah, in February 2002, was the third state granted a waiver under the Bush administration's new plan. </p>
<p>But Utah's program marked the first time the federal government has allowed a state to pay for new beneficiaries by cutting care for current enrollees, and the first time that a state was able to offer some enrollees a limited benefit plan that did not include hospital coverage.</p>
<p>Under the plan, about 17,600 adults (children and the elderly were not affected) faced significant cuts in many benefits, including dental, vision, psychiatric, physical therapy, and drug coverage, and increased co-payments for many services, including doctor visits and drugs.</p>
<p>New coverage was provided for a limited number of adults up to 64 years old whose income was less than 150 percent of poverty. These enrollees were only covered for physician visits and some emergency and preventive care, but no hospital or specialty care. There was a $50 enrollment fee as well as co-payments for many services.</p>
<p>Additionally in 2003, the state provided a $50 monthly subsidy for employer-sponsored health insurance to workers earning less than 150 percent of poverty whose employer paid at least half the insurance premium. </p>
<p>What has been the result of this experiment, aside from a cut in benefits for some? A study by the Center on Budget and Policy Priorities found that the co-payments imposed by Utah on Medicaid beneficiaries, even if small, created a significant barrier to recipients' ability to get care. The study found that co-payments, which began when the waiver was approved in February 2002, significantly reduced the use of health-care services. Under one estimate, which assumed that physician visits would have remained constant at the same number per 1,000 enrollees if there had not been co-payments, the trips to doctors dropped to less than half when people paid even a small co-payment. Hospital co-payments led to about a 25-percent drop in utilization, the analysts found. </p>
<p>And this drop in utilization, caused by people unable to afford the added co-payments, may not even have lowered the state's longer term Medicaid spending. Studies have shown that co-payments can limit needed care, resulting in patients finally seeking care when they are much sicker and care costs are more.</p>
<p>At the same time Utah broke with the policy of providing any benefit offered to anyone who qualified. Instead, it became the first state to provide a benefit only to a limited group of those who qualified. The state offered a new physician benefit to 19,000 people and closed enrollment in November 2003. But the cost sharing imposed on enrollees for this limited benefit made it hard for many to utilize it. By May 2004, the number of enrolled had fallen to 14,700. A survey by the state health department of about 500 people (out of 1,709, or 27 percent) who had dropped out of the program after the first year, found that about one-third did so for financial reasons, in particular because they could not afford the enrollment fee of $50. Studies are under way to assess the impact of providing only physician overage without specialty or hospital care, especially for AIDS patients.</p>
<p>In August, 2003 Utah added another program to the expanded coverage financed by cuts to existing Medicaid enrollees. It offered a select group of those under 150% of poverty a $50 subsidy for individuals and $100 for families to help them pay their share of employer-provided health insurance. The state ear-marked 6,000 slots for enrollees. But in a report in December, Utah Issues Center for Poverty Research and Action said that only 49 workers were enrolled because the subsidy was way too little to make coverage affordable for such a low-income group.</p>
<p>Under Leavitt's guidance, Utah began dismantling its medical safety net for the poor under the guise of trying to help more of the uninsured. Many of those already enrolled in Medicaid lost benefits and paid more for care while a very small number of people got very limited help to see a doctor. Now, as Secretary of Health and Human Services, Leavitt is poised to try to do similar things nationally. The question is whether Congress will be a willing party to the dismantling of Medicaid. </p>
<p><i>Barbara T. Dreyfuss is a freelance writer based in Virginia.</i></p>
</div></div></div>Wed, 02 Feb 2005 18:18:07 +0000144256 at http://www.prospect.orgBarbara DreyfussAlmost Heaven?http://www.prospect.org/article/almost-heaven
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>In April 2004, several members of the West Virginia House of Delegates ﬂew to Minnesota to speak at a national meeting of the Council of State Governments. The legislators were eager for support from other states to bolster their ongoing effort to force drug companies to lower prices. </p>
<p>Speciﬁcally, the West Virginia delegation wanted the council to include its legislation, designed to pressure drug companies to lower prices for state employees and other residents, in the forthcoming book <i>Suggested State Legislation</i>, an annual publication that highlights laws considered innovative and worthy of review. On day one, the West Virginia lawmakers were sent before the group's Health Capacity Task Force, which makes recommendations on which health laws to include in the book. Looking around the room, West Virginia ofﬁcials were shocked to ﬁnd that of the 23 members present, only eight were legislators and seven were drug-industry employees. And of the 17 guests who were not representing either the council or West Virginia, nine were drug-company lobbyists. The committee refused to recommend the state's law for inclusion. </p>
<p>Still, the West Virginia legislators were optimistic that they would get support the next day when they went directly before the panel with the ﬁnal say, the Committee on Suggested State Legislation, which is composed solely of legislators. As they entered the meeting room, they saw 20 members of the committee together at a table. Behind them sat rows of well-dressed onlookers. The panel leaders asked the audience members to introduce themselves. As they did so, West Virginia Delegate Don Perdue, there to speak about the legislation he helped draft, winced. Seated behind the legislative panelists were 21 lobbyists from the pharmaceutical industry. “You know you don't have a chance,” one panelist whispered to Perdue, just in case he had missed what was painfully obvious. Once again the West Virginia law was rejected for the council's book. </p>
<p>The drug industry's determination to block West Virginia from getting wider state support illustrates how intent it is on ﬁghting every effort to limit its revenues. Fearful that any state's success in containing costs might rapidly be adopted by others, the industry tries to squash signiﬁcant proposals quickly. Especially over the last four years, the industry has spent tens of millions of dollars trying to prevent any signiﬁcant cost-control measures from passing, hoping it can bar precedents that might spread to other states or even to the federal level, resulting in drastic cuts in proﬁts. These efforts are likely to intensify as states are facing both local ﬁscal pressures and the recognition that the Bush administration and the Republican-controlled Congress are not likely to impose measures that would impinge on the proﬁts of their pharmaceutical allies.</p>
<p>Beginning in 2001, as the economy worsened and tax revenues slowed, state budget crises deepened. At the same time, increasing enrollment led to a jump in Medicaid budgets, as did skyrocketing drug costs, which also increased state-employee health costs. Pressed to balance state budgets and to help the uninsured, especially the elderly, state ofﬁcials looked for ways to cut drug prices, which were soaring way above inﬂation. One strategy, adopted by about half the states since 2001, was to demand Medicaid rebates from drug companies above what was required by federal law. Another was to form buying consortiums to purchase drugs for state employees or Medicaid enrollees. More than 320 bills and resolutions related to discounts, subsidies, buying strategies, manufacturer price disclosure, and other cost-containment measures were introduced, and many seriously considered in 2004, according to the National Conference of State Legislatures. Additionally, in desperation, a number of governors and localities started facilitating drug imports from Canada, where prices are considerably lower. </p>
<p>The industry trade association, the Pharmaceutical Research and Manufacturers of America (PhRMA), is now responding in a big way. While the drug industry has long poured money into federal congressional campaigns, it didn't pay much attention to the states until the recent cost-cutting measures began. In the late 1990s PhRMA ran state lobbying from Washington; now, it has opened eight regional ofﬁces and hired at least one person in each state to keep watch. For ﬁscal year 2004, PhRMA budgeted a whopping $48.7 million for state advocacy, as Robert Pear reported in <i>The New York Times</i> in June 2003.</p>
<p>In 1998, the drug industry contributed $2.6 million to state candidates and party committees, according to a 2003 study conducted by the Institute on Money in State Politics. In 2002, contributions soared to $6.25 million. Overall, from 1998 through 2002, more than $13 million was given to candidates and state parties, more than half of that going to ﬁve key states, mostly to people in powerful legislative and executive positions. “The tacit understanding,” says Perdue, “has been if you have larger aims, if you are going to run for wider political ofﬁce, that the drug industry contributes a lot of money -- and they can really hurt you.” </p>
<p>Another industry tactic, whenever legislation limiting drug-company revenues gets traction in a state, is to use high-priced lawyers, think tanks, and professors to bombard patient groups, businesses, and poorly staffed legislators with reams of data and reports showing the danger of legislative proposals. These representatives warn patient groups that restrictive pricing will also limit funding for research on new cures for disease and could limit access to needed drugs, and they warn business groups and others that drug companies will pass on costs to them to compensate for such price limits. Drug-company executives see such collaboration with advocacy groups as key to defeating many state initiatives. Wyeth CEO Robert Essner, at PhRMA's 2004 annual meeting, lauded “the powerful and effective state-based patient organizations -- groups that we worked arm [in] arm with to defeat restrictive preferred drug lists and burdensome prior authorization requirements.” </p>
<p>When laws have been passed at the state level, PhRMA has moved quickly to delay their implementation or challenge their legality. And while debt-strapped states and poorly funded consumer or labor groups have limited resources to ﬁght these challenges, the drug industry throws unlimited resources to block state efforts. </p>
<p>In 2000, Maine became the ﬁrst state to seek lower prices for uninsured residents, using its control over Medicaid policy as a club against the drug industry. Maine required drug companies to give the uninsured signiﬁcant discounts or face roadblocks to using their drugs for Medicaid. The law even gave Maine the power to establish price controls on all drug sales in the state if policies did not, within a few years, make lower prices widely available. Maine's efforts were immediately challenged in court by the drug industry, but in 2003, the U.S. Supreme Court let the state implement the plan while court challenges continued. Faced with years of litigation, state ofﬁcials made changes they hoped would short-circuit the legal challenges, and, in January 2004, started implementing a modiﬁed plan. In 2002, Hawaii enacted a version of Maine's law. By 2003, 18 state legislatures had considered proposals like the Maine plan, and three adopted measures that would force price concessions for residents not covered by Medicaid. </p>
<p>In Ohio, a coalition led by the state AFL-CIO was unwilling to wait and see how the courts handled PhRMA's challenge to the Maine law. In January 2002, the state AFL-CIO and a coalition of 300 groups -- including churches and consumer, senior, and community organizations -- prodded a state legislator to introduce a bill modeled on the Maine initiative. When the Republican-controlled Ohio Legislature and governor kept it bottled up, the coalition decided to force legislative action through a citizens' initiative, which under state law requires legislative action if 96,000 signatures are gathered from half the state's 88 counties. (If legislators still stonewall or oppose a measure, the law allows for a proposal to be taken directly to the voters, if another 96,000 signatures are collected.) </p>
<p>From day one the drug industry fought the coalition. It challenged the initial 100 names the coalition ﬁled to get the petition drive under way, so the coalition submitted a new petition, signed by 100 local and county ofﬁcials. Once it began, the union-led petition drive collected 143,000 signatures in a mere eight weeks. In virtually every county, PhRMA challenged the petitions. “We spent tens of thousands of dollars ﬁghting the legal challenge,” notes Ohio AFL-CIO legislative director Tim Burga. “I didn't anticipate that PhRMA would use a bottomless pit of money to ﬁght us,” recalls coalition leader Cathy Levine, executive director of the Universal Health Care Action Network. (Both sides decided to eventually negotiate a much watered-down plan, with PhRMA coming around only after the U.S. Supreme Court ruled that Maine could start its program.)</p>
<p></p><center>* * *</center>
<p>It's West Virginia that today is sparking national interest. Drug costs are a particular burden in the Mountain State, which has the second-lowest per capita income nationally and the fourth-oldest population. (Seniors use the most drugs and often lack drug-insurance coverage.) In 2002, West Virginians averaged 15 prescriptions per person, when the average in the United States was 10.6. That same year, 25 percent of state Medicaid spending went to medicines; in the United States overall, it was 17 percent. </p>
<p>West Virginia House Speaker Bob Kiss decided to act when he realized that the recently passed federal Medicare prescription-drug bill was not going to help states with their expenses and may have even “installed further protectionism on price.” In late 2003, he asked House health-committee members and staff to develop a plan to lower drug costs, which was introduced early in the 2004 legislative session. The plan they developed required drug companies to sell in the state at prices negotiated by the federal government for some of its own purchases. These federally negotiated prices are known as the federal supply schedule, or FSS, and are mostly more than 50-percent lower than average wholesale prices of branded drugs. Under the West Virginia plan, companies could get a waiver to sell at higher prices, but only if their manufacturing and research costs, not marketing expenses, justiﬁed it. </p>
<p>The bill sped through the West Virginia House, passing unanimously within two weeks. But then it bogged down in the state Senate Health and Human Resources Committee, whose chairman represents part of Morgantown, a city where Mylan Pharmaceuticals has a major facility. Finally, legislative leaders decided to hold a joint House-Senate hearing on the bill in February 2004. Citizens representing senior groups, hospitals, and labor and church organizations spoke in support; the drug industry, pharmacists, the West Virginia Camber of Commerce, a television manager, and veterans spoke against it. </p>
<p>PhRMA had been particularly successful in persuading some veterans groups to oppose the measure. The industry organization contacted various veterans groups and invited them in on a conference call about the bill and its effects. During that call, PhRMA essentially fed them misinformation, claiming that the proposal would increase veterans' costs when, in fact, veterans only pay a co-payment determined by Congress, unrelated to what the Department of Veterans Affairs (VA) actually pays. And even if it were related in the future to the VA's own costs, the VA has won prices substantially lower than the FSS level for most drugs. </p>
<p>Veterans responded to PhRMA's brieﬁng by writing to legislators. “I was not aware of it before we were contacted by [PhRMA],” says National Association for Uniformed Services legislative director Ben Butler. “Basically, we drafted our letter based on the information that I was provided in that conference call. So, while I can't remember exactly what was said during the conference call, I can tell you that what was in our letter was a reaction to that.” </p>
<p>The veterans' efforts had a big impact on legislators. “It caused a lot of heartburn with legislators because nobody wants to harm veterans,” says Perdue, who is chairman of the House health panel. The week before the February 2004 hearing, Senate health-panel Chairman Roman Prezioso received a petition signed by some 200 veterans on the issue, plus the letter from Butler, which he read on the Senate ﬂoor. Drug-industry lobbyists were quoted in the local press making the same arguments. </p>
<p>During the hearing, Boston University School of Public Health professor Alan Sager, invited to testify by House supporters of the proposal, offered a point-by-point refutation of the arguments put forth by veterans groups and a strong endorsement of the legislation. Within a few weeks, Sally Pipes, president of the free-market think tank Paciﬁc Research Institute, wrote a scathing critique of Sager's testimony and circulated it to lawmakers and the media. Institute ofﬁcials acknowledge that they receive drug-company money but say it is less than 1 percent of their funds; PhRMA, the Lilly Endowment, and Pﬁzer are listed among the group's $10,000-and-above donors for 2003. </p>
<p>Finally, on March 13, 2004, the last day of the legislative session, with many senators still amenable to drug-industry arguments, a compromise plan was worked out. Instead of mandating that drug companies sell to the state and the uninsured at FSS prices, lawmakers created a council to choose a pricing schedule, a plan for implementing it, and other ways to lower drug costs. Under the law, whatever pricing schedule the council adopted, the Legislature had to either endorse or reject it by the end of 2005. One of the more innovative and industry-threatening parts of the law allows private insurers, small businesses, and individuals to also take advantage of the program to get lower-cost drugs. And because lawmakers were concerned that the drug companies would stop selling in the state, they included speciﬁc provisions to prevent this. </p>
<p>Even though the law did not force drug companies to adhere to the federally negotiated pricing list, the drug industry was nervous. At PhRMA's annual meeting in June 2004, its retiring president, Alan Holmer, citing West Virginia's law and a few other events, warned members that “free-market pricing is now at increasing jeopardy in the U.S.” Immediately after the plan passed, the drug industry went into high gear to make sure the council would put forth innocuous proposals. PhRMA hired six more lobbyists, bringing to nine the total registered with the West Virginia Ethics Commission. Another 26 people were registered by individual drug companies to lobby the Legislature. In the end, in a state with only 138 legislators, the drug and biotechnology industries registered 35 lobbyists.</p>
<p>What's more, PhRMA sought lobbyists with political connections. Perhaps its most signiﬁcant catch was Phil Reale, hired as local counsel in May. Reale, who used to hold the same position for Wyeth Pharmaceuticals, has been PhRMA's chief spokesman on the ﬁght over pricing in West Virginia. What has a number of Democratic ofﬁcials outraged is that Reale is also the general chairman of the West Virginia Democratic Legislative Council, an arm of the Democratic Party charged with maintaining and increasing Democratic control of the Legislature. Reale says not to “attach much signiﬁcance” to his being the council head, saying it is not an important post in West Virginia. But the group's ofﬁcial Web site quotes a number of legislators who attributed their election victories to its help. In the 2001–02 campaign cycle, its political action committee spent almost $163,000 (a small but helpful amount in tiny West Virginia), which included salary for a staffer, direct mail, and get-out-the-vote and media efforts, according to the Center for Public Integrity. </p>
<p>Another important lobbyist for the industry in West Virginia is Thom Stevens, who represents Purdue Pharmaceuticals, Glaxo Wellcome, and Eli Lilly. Legislators raise concerns that he also lobbies for the American Academy of Family Physicians. They believe he has tried to bias doctors against the legislative efforts through comments in the legislative newsletter he sends out on behalf of family physicians. </p>
<p>From April through October of 2004, the West Virginia Legislature's drug-pricing council met every two weeks, developing a benchmark for price negotiations, a plan to simplify access to free drugs for the poor, and other proposals to make lower-priced drugs more available. The meetings were open to the public, and at times, say attendees, council members were outnumbered by a platoon of pharmaceutical lobbyists who came armed with brieﬁngs and reports from their lawyers. “In a state where most legislators are part time … and the Legislature has a small staff,” says Kevin Outterson, a law professor at West Virginia University and a council member, “the industry can roll in, bring in national experts, have responsive memos to relatively minor points pushed out by gigantic law ﬁrms.” </p>
<p>Despite this, the council in September recommended that West Virginia use the federal government's negotiated price list (the FSS) as a base for determining prices with drug companies. The council concluded that if the state bought drugs at the federally negotiated rate, it could save $24 million for Medicaid and $19 million for state employees per year just on the 25 most commonly used drugs. The council also recommended a cabinet coordinator for state drug purchases and encouraged West Virginia to join other states for greater leverage. These proposals were unanimously endorsed at a special legislative session in mid-November, and two weeks later, the governor created the cabinet-level coordinator post. </p>
<p>The catch is that it will be up to the next governor to appoint a negotiator, reach out to other states, oversee how tough the negotiations will be, and decide if there will be any penalties for companies that refuse to give major price concessions. The drug industry is hoping that the new governor, Democrat Joe Manchin, will be more cooperative than confrontational. For one thing, Manchin's daughter is vice president of government and public relations for Mylan Pharmaceuticals, a generic-drug ﬁrm that recently bought a brand-name company. With election reports incomplete, tallies thus far indicate that the drug industry contributed more than $73,000 to Manchin's 2004 campaign, much of it from Mylan employees, according to the Institute on Money in State Politics.</p>
<p>Many states have been watching West Virginia closely. First, they wanted to see what the Legislature would do. Now, they are waiting to see how successful the state is in lowering prices.</p>
<p>These state-level efforts are critical. The Bush administration has just come down against allowing lower-priced drug imports, and neither the administration nor Congress is likely to squeeze their drug company allies for major pricing concessions in Medicare, Medicaid, or otherwise. What will keep the drug companies' feet to the ﬁre will be continued public agitation. Chellie Pingree, the former Maine Senate majority leader and current Common Cause president, who introduced the Maine drug-discount bill, notes that the keys to her success in Maine were the phone banks organized by seniors groups and the large public meetings of grass-roots supporters, which swayed key ofﬁcials to back her bill despite tremendous drug-industry opposition. After all, even PhRMA knows the customer is always right. </p>
<p><i>Barbara T. Dreyfuss is a freelance writer in the Washington, D.C., area.</i></p>
</div></div></div>Sat, 15 Jan 2005 00:06:53 +0000144212 at http://www.prospect.orgBarbara DreyfussThe Illness Departmenthttp://www.prospect.org/article/illness-department
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>Lost in the frenzied discussion about who is winning the lottery for a flu shot and how much price gouging is going on for the remaining vials is the question of how much George W. Bush's politicization of the Food and Drug Administration (FDA) played in creating this crisis. </p>
<p>Over the past four years, the agency has been largely taken over by free-market ideologues and officials with close ties to regulated industry. Key Bush administration appointees at the FDA include acting FDA Commissioner Lester Crawford, who worked for the food manufacturers; an assistant legislative commissioner who worked for the biotechnology industry; and an acting deputy commissioner of policy who worked for the chemical industry. But perhaps most important in bringing the FDA into a cozy relationship with the drug industry has been its chief counsel, Daniel Troy.</p>
<p>With Troy's appointment, the agency's top legal post went -- for the first time in decades -- from being run by a civil servant to being run by a political appointee. Troy, a staunch free-market ideologue and a leading member of the Federalist Society, clerked for one of the nation's most conservative judges, Robert Bork. In the 1990s, before coming to the FDA, Troy represented a major tobacco company, Brown &amp; Williamson Tobacco Corp., and helped win a Supreme Court ruling against FDA oversight of tobacco. He also did legal work for Pfizer and filed legal briefs against FDA oversight of drugmakers' off-label marketing of medicines. With the FDA operating under an acting commissioner during much of Bush's tenure, Troy has wielded enormous power.</p>
<p>Under his guidance, the FDA has filed legal briefs asking courts to side with drugmakers and device manufacturers against plaintiffs. In fact, Troy urged hundreds of drug-company lawyers, at a meeting last December, to suggest other lawsuits that the FDA could become involved with.</p>
<p>In March 2002, Troy launched another dramatic initiative, taking away from field offices the responsibility for issuing warning letters to companies, requiring them to be screened first by the general counsel's office. If the FDA finds problems after inspecting a manufacturing site, it can, at its discretion, issue a warning letter telling the company what it must do to comply with the law if it doesn't want to face penalties. After Troy's centralization of warning letters, the number issued dropped dramatically, according to John Scharmann, consulting editor at FDA Webview, an online FDA-watch newsletter, and former head of the FDA's Denver district office.</p>
<p>At the same time, the FDA announced that it was revamping how it assessed the quality of manufacturing facilities. After a product is approved, the FDA must, by law, inspect a plant every two years. If problems are found, the FDA must decide whether (and when) to re-inspect or simply to meet with a firm or verify it has made the necessary corrections. </p>
<p>In the late 1990s, the FDA had strengthened its inspection of facilities that made biologics, particularly vaccines. Many of the standards that it had used for chemical drugs were for the first time applied to these other products. Inspections lengthened, inspection teams were larger, standards were more extensive. The focus was less on purely scientific issues and more on specific cleaning and quality-control procedures. Two vaccine manufacturers were found to have major problems and withdrew from the vaccine business.</p>
<p>When the Bush administration came in, however, it launched a new approach, termed "risk-based," to inspections. Rather than expand FDA oversight overall, the agency decided to concentrate on select products, processes, and issues. "In a risk-based approach," says William Vodra, who has served as associate chief counsel at the FDA and is now a partner at the Arnold &amp; Porter law firm, "you pick the things with the highest risk and go after that." At the same time, FDA budget resources have been squeezed. But new laws prohibit money from coming out of such things as drug-review procedures, and "some kinds of inspections" may have suffered, Vodra notes.</p>
<p>So what does this have to do with the current flu crisis, which was triggered when fears about possible contamination led British regulators to shut down a plant in England where Chiron Corporation was to have produced half of U.S. flu vaccine needs? </p>
<p>"Was the agency not aggressive enough with Chiron to fix the problem, or did they say, 'These problems are not important,' or, 'We don't have the resources to fix it'?" questions a Senate Democratic staffer.</p>
<p>That is what Senator Edward Kennedy and Representative Henry Waxman are trying to find out. They have requested that the FDA provide documents on what it did after it found, back in June 2003, that Chiron had, according to <i>The Wall Street Journal</i>, "systemic quality-control issues." And they want materials on FDA actions after August 2004, when the FDA learned that there were contamination problems at the Chiron plant. Waxman says that even after Chiron announced a delay in releasing flu vaccine, the FDA didn't do a full inspection. Instead, as Crawford stated, "We at FDA were waiting for Chiron's report to determine if further action, such as on-site inspection, was needed." The British, however, not only sent a team to the plant and identified serious problems, but, says Alison Langley, senior press officer for public health desk at Britain's Department of Health, "developed contingency plans" to get vaccine supplies from elsewhere if needed. </p>
<p>On October 26, Waxman charged that the FDA was deliberately withholding these documents until after the election. While Crawford wrote four days prior that he could not comply with the congressional requests because staffers were too busy trying to find extra vials of vaccine, Waxman said that communications he received from within the FDA indicated that the documents were already sent to Crawford's office and awaiting release. </p>
<p>So the question is what did FDA officials know, when did they know it, and what did they do about it? It looks like the Bush administration wants us to wait until after the election to find out.</p>
<p>
<i>Barbara T. Dreyfuss is a freelance writer based in Virginia.</i></p>
</div></div></div>Fri, 29 Oct 2004 23:31:20 +0000144033 at http://www.prospect.orgBarbara DreyfussCheap Trickhttp://www.prospect.org/article/cheap-trick
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>Back in 1996, Terry Johnson, the human-resources director for Ada County, Idaho, was excited about his new health-care coverage. He had just helped the county become the first in the United States to offer employees a medical savings account (MSA) as an alternative to traditional indemnity health insurance, and he was eager to try it. The accounts would be exempt from state taxes up to $2,000.</p>
<p>Under the program, Johnson would contribute $900 to this account and his employer, the county, would contribute the remaining $1,100. Johnson could use that money for medical expenses, and if he remained healthy and didn't use it up that year, it would carry over to the next year. He could even withdraw the money for any other use, although he would pay taxes on it (and if he was not yet 59, he would also pay a 10-percent penalty). Along with this he would have an insurance plan. The one catch: He would be responsible for the first $2,000 in costs should he become sick. But the idea was that the MSA would be there to cover this high deductible.</p>
<p>“So I was thinking it's going to be great for me because at least I would have something to show for my good health at the end of the year,” says Johnson. As a generally healthy person, he says, he felt that traditional insurance was a waste. “I just never got anything out of that benefit.” </p>
<p>But Johnson made a bad gamble. That year, he decided to go hang gliding. “I broke my ankle,” he notes ruefully. “And that pretty much ate up the funds because I had to have two operations.” Because the county paid into the savings account in installments, and had only put in $400 when Johnson sought medical care, not only did he have to pay the $900 deductible employees were responsible for, he also had to front the full $2,000 deductible “right off the bat.” If he had stayed in his traditional insurance plan, he would have had a $100 deductible and 20-percent co-payments for doctor services, up to an $800 limit. While both plans may have cost him about the same amount in the end (it is unclear what the co-payments would have amounted to under the traditional plan), the MSA was definitely not the boon he had hoped for.</p>
<p>Things did not go much better for the county. It did save $39,000 in insurance premiums for its employees, but that was only about half what it had expected, as fewer people than anticipated enrolled in the catastrophic insurance. Worse, Ada officials were shocked that, as a result of the MSA, premiums for the employees who remained in the traditional insurance plan were going to skyrocket. “There was cherry-picking,” Johnson told me, “because the MSAs drew all the healthy folks that would otherwise subsidize those that stayed in the rich traditional plan.” With the traditional plan serving only the sicker employees, its costs mounted. In fact, the insurance company Regence Blue Shield of Idaho told the county that if it continued with the MSAs, it could expect premiums to jump an astronomical 15 percent -- at a time when health-insurance-premium increases were the lowest in 30 years. (Nationally, employer premiums increased 2.1 percent in 1997 and 0.5 percent in 1996, according to a KPMG Peat Marwick survey.) At the end of 1997, the county dropped the MSA option.</p>
<p>Despite skepticism of MSAs by many employers, unions, and workers, promotion of such tax-free savings accounts and high-deductible insurance plans has lived on thanks to a band of ideologically minded conservative Republicans who have pressed for legislation and regulations to make them more attractive. With the arrival of George W. Bush in the White House, their efforts succeeded. Now, with health-care costs rising at double-digit rates and the latest data available showing more than 43 million Americans uninsured in 2002, health care is again a major campaign issue. And at the core of Bush's health-care campaign platform is expansion of these schemes. </p>
<p>Bush called for that in his State of the Union address and lauds them at virtually every campaign stop. In March, at a discussion sponsored by the Chamber of Commerce, he declared, “I've made my stand. I believe that the best health-care policy is one that trusts and empowers consumers, and one that understands the market.”</p>
<p>Tax-free MSAs, along with high-deductible plans, are simply a way to make individuals pay a larger share of their health-care costs. Conservatives put a pretty face on the system, calling it “consumer-directed health care,” a term designed to play off the public backlash against the tight restrictions that were imposed in the past by HMOs. They argue that consumers, not insurers, should determine what care they need. And they should pay for it themselves, with money that employers and employees put aside in various tax-free accounts. People will become wise shoppers, they argue, look for bargains, and purchase only the care they need. Conservatives predict that this will drive down costs. And for major medical problems, they argue, people will have catastrophic insurance.</p>
<p>Nixon administration economist Jesse Hixson is often credited with developing the concept of health banks to fund health care. But it was Patrick Rooney, former head of Golden Rule Insurance Company, who spearheaded the political organizing that ultimately got state and then federal action. Rooney has poured more than a million dollars into Republican coffers since 1989. Golden Rule, now part of UnitedHealthcare and run by Rooney's daughter, was a pioneer in health savings account (HSA) schemes. Rooney's zeal for MSAs dates to a 1990 meeting with John Goodman, founder of the National Center for Policy Analysis (NCPA), who in turn had been converted to the cause by Hixson. Rooney joined the center's board and helped fund it. The NCPA, along with a bevy of conservative think tanks -- including the Galen Institute, the American Enterprise Institute, the Cato Institute, and The Heritage Foundation -- are the champions of consumer-directed care. Rooney also pulled together a group of small insurers, which founded the Council for Affordable Health Insurance in 1992, to promote it.</p>
<p>Despite those efforts, the brave new world of consumer health care didn't really begin on the national level until 1996. (A number of states like Idaho had already allowed accounts exempt from state taxes to be used for health expenses.) After a fierce partisan battle, Republicans enacted legislation to allow tax-free accounts, called MSAs, but only for small businesses and self-insured people. Consumers were also required to buy high deductible insurance, which also required consumer co-payments. Democratic opposition, led by Senator Ted Kennedy, limited the number of people in such plans to 750,000. The Government Accounting Office reported that after two years, only 50,172 people were enrolled. </p>
<p>Then Bush, pressured by conservative Republicans on Capitol Hill and pro-tax-cut and small-business groups, came into office, determined to dramatically speed up the adoption of these tax breaks and insurance schemes. First the Treasury Department, in 2002, approved Health Reimbursement Accounts, another form of tax-free fund. Paid by employers, employees can use them to pay health-care costs. But these were limited in appeal because they were not portable from job to job and workers could not contribute to them. </p>
<p>Then, last November, with strong help from the White House, Republican congressional leaders succeeded in attaching to the Medicare prescription-drug bill a tax-free account that corrects these problems and threatens to dramatically alter health insurance as we know it. Former House Speaker Newt Gingrich, a strong opponent of a government-run Medicare program and of comprehensive employer insurance programs, was instrumental in persuading reluctant Republicans to vote for the Medicare bill because it allows these tax-free funds, dubbed HSAs. Gingrich lauds them as “the single most important change in health-care policy in 60 years.” The new law now allows funds to be contributed by both employers and employees, rolled over if not used, and taken from job to job. It's also available to everyone. But it requires people with the savings accounts to have only a catastrophic insurance plan with a high deductible. </p>
<p>Experts believe that, thanks to the new law, consumer-directed health care is about to take off. Strapped with 14-percent premium increases in 2003, employers are desperate for a strategy to cut costs, and HSAs are a more subtle way to shift costs on to workers than merely raising premiums. Many employers appear ready to offer the HSA–catastrophic plans as an option alongside traditional insurance, but others will offer employees various savings-account–high-deductible insurance options only. </p>
<p>President Bush and administration officials are on a crusade to get the word out to employers. Almost immediately after Bush signed the Medicare law in December, the Treasury Department issued guidelines to jumpstart the plans and, in all, eight have been issued in the eight months since the law passed. On May 19, Treasury Secretary John Snow told a Senate Aging Committee hearing that HSAs are “one of the single best ideas” to deal with rising health-care costs. </p>
<p>Republicans also see HSAs as a way to slash budgets for federal and state employees, both by shifting health costs on to workers and by reducing overall utilization. They would like to use them in Medicaid and Medicare, too. In April, the Office of Personnel Management asked insurance carriers for proposals to offer HSAs to federal employees next year. Gingrich, now at his own think tank, has launched a project to promote these accounts to states. It's aimed at having all state-employee health plans and Medicaid programs offer HSAs within three years. Gingrich is also lobbying Congress to open Medicare to HSAs. And Lumenos Inc., which administers consumer-directed plans for employers who directly pay employee health expenses, has already been talking with top officials in three states about setting up such a plan for disabled Medicaid enrollees.</p>
<p>On a state level, no one has been a more ardent supporter of HSAs than the president's brother, Florida Governor Jeb Bush. After signing legislation June 14 requiring all insurers in Florida to offer HSAs to small businesses, he started a two-month road show, hosting town-hall meetings throughout the state to promote them. Press reports indicate that Bush wants to provide HSA–type accounts for Florida's Medicaid recipients as well.</p>
<p>The problem is, these accounts may be “one of the single best ideas,” as Snow put it, to deal with rising health-care costs for employers, but they are one of the worst for individual employees. While Terry Johnson was lucky to have an insurance package that limited his liability to $900, most employers will not be so generous, leaving anyone foolish enough to sign up for an HSA with the possibility of enormous health-care debts. First, the new Medicare law calls on families to pay at least the first $2,000 in costs; individuals must pay, at a minimum, the first $1,000, but the deductible is up to the employer, and many plans will likely require much higher ones. The current average deductible in insurance plans is $300 for an individual and $600 for families.</p>
<p>Supporters argue that employers can offset these costs by contributing to the savings account. But the whole premise of this approach is that people must feel some pain in paying for health care or they won't be wise consumers, so no employer is going to totally cover the deductible. In fact, a survey of almost 1,000 companies, most with more than 500 employees, conducted by Mercer Human Resource Consulting and released in April, found that 39 percent did not anticipate putting any money into savings accounts. </p>
<p>Besides the huge deductibles, consumers will have co-payments as well. While the law does set limits for total out-of-pocket spending, deductibles, and co-payments for in- network care, these are set at a high $5,000 for individuals and a whopping $10,000 for families. In fact, consumers can get stuck with even higher medical bills. First, the liability limits only apply if people use doctors and hospitals in the insurer's approved network. If a person decides, for whatever reason, to go to a provider outside the network, there is no ceiling on what he or she pays out of his or her own pocket. What's more, the insurance and spending caps only apply to “covered” care. Republicans are already trying to reduce the scope of care that insurers are required to cover. In that regard, House Speaker Dennis Hastert has endorsed legislation to allow people to buy insurance in other states if their own imposes too many mandates on insurers. </p>
<p>While some supporters argue that employees will have lower premiums to pay, even if their deductibles and co-pays rise, that is not necessarily so. How much employees pay in premiums will be up to the employer. More generally, “Employers will use it as a reason to shift costs on to employees or get out of the business altogether,” says JoAnn Volk, legislative representative for the AFL-CIO. “And they will say, ‘I'll make a contribution to your account, [then] you're on your own.'” Neil Trautwein, the National Association of Manufacturers' assistant vice president for human-resources policy, agrees. “We see the wheels coming off employer-based health care,” he says. “Costs have risen to such an extent, and Americans are aging. We really see increasing problems with maintaining the employer-based model into the future.” He worries that unless Americans can be persuaded to buy into the idea of consumer-directed care, “increasingly calls will come for a government-run system.” </p>
<p>Chris Jennings, deputy assistant to President Clinton on health policy and now an informal adviser to the John Kerry campaign, says that concern about workers losing employer insurance coverage is one of Kerry's problems with HSAs. Jennings points to a recent study by MIT economist Jonathan Gruber, which warned that HSAs could increase the number of uninsured as employers use HSAs as an excuse not to provide coverage.</p>
<p>Some smaller employers have started to use HSAs in the six months the law has been in effect, although the law passed too late in the benefit enrollment cycle for most large employers to make the shift. But it looks like they'll catch up next year. The Mercer survey found that nearly 75 percent are “very or somewhat likely” to offer an HSA by 2006. Another survey, by the National Business Group on Health, of 159 of the nation's largest companies found one-third expecting to offer a consumer-directed plan next year. The Mercer study also found that nearly half of large employers surveyed hope that HSAs will let them back away from retiree benefits, as workers will now be able to accumulate tax-free cash to pay for retirement health costs.</p>
<p>Forcing workers to shoulder a much larger part of their medical expenses to cut health-care costs for employers is likely to harm consumers in other ways, too. To begin with, Jennings warns that these plans, to the extent that they reduce overall costs, do so by “reduc[ing] the use of desirable as well as undesirable care.” In other words, people will stop getting the care they need in addition to the care they don't need. </p>
<p>Initial results at firms with tax-free accounts show that these accounts cut use of services. People go to the doctor less often, have fewer surgeries, make fewer hospital visits, and use fewer medicines. Textron Inc., which manufactures aircraft and other products, has shifted all its employees into consumer-directed plans. The company started in 2002 with the 1,500 employees in its corporate office center and at Textron Financial. An analysis of two years of claims data for the pilot program enrollees, compared with when they had traditional ppo insurance, found overall medical usage down 7 percent, inpatient hospital admissions down 22 percent, outpatient hospital visits down 6 percent, emergency-room visits for less severe conditions down 9 percent, total surgeries down 11 percent, physician office visits up 3 percent, diagnostic tests down 5 percent, and total prescriptions down 1 percent. Aetna found a similar pattern for 13,500 people who enrolled since January 2003 in its health reimbursement arrangement.</p>
<p>Conservative Republicans would applaud these numbers. But what happens if the upshot is many more people not getting the treatment they need? “It leads to a reduction in care, period, including care that's needed,” warns Karen Davis, president of the Commonwealth Fund, a foundation that sponsors health-policy research. Not only will more people end up waiting until illnesses are urgent before they go for care, she says, but public health could be affected as people avoid going to the doctor for what they think are coughs and colds but turn out to be more serious infectious diseases.</p>
<p>Another long-term drawback of MSAs and high-deductible plans will be rising premiums for those with traditional insurance. Congressional Budget Office analysts, citing Ada County's experience, warned that other such experiences and “economic theory” indicate those who would choose such plans would be the “relatively young and healthy.” Despite denials by HSA advocates, preliminary data confirms this. Humana Chief Actuary John Bertko stated at a Joint Economic Committee hearing in February that at his own company, early evidence showed that those who went into these types of plans “are clearly healthier.”</p>
<p>That leaves the less healthy covered by traditional comprehensive insurance, which drives premiums up. A “death spiral for comprehensive coverage is definitely a risk,” warns Edwin Park of the Center on Budget and Policy Priorities. This breaks down the “basic function of insurance,” warns Davis. “The purpose of insurance is to collect premiums from everyone, healthy and sick, and you use the money to help the sick pay their medical expenses.” Concerned about this, many insurers offer employers -- and employers offer employees -- only these products as a total replacement for traditional insurance. Bertko told the Joint Economic Commission that Humana, for example, would do this in order to “maintain the integrity of this risk pool.” </p>
<p>Even conservative champions of consumer-directed health plans may find them unsatisfactory in the long term, says Republican Liz Fowler, chief health counsel of the Senate Aging Committee. Fowler stood up at a Hill forum on consumer-directed health care, sponsored by the bipartisan Alliance for Health Reform, to tell the panelists who back the concept to try it before they tout it. Fowler said she is enrolled in a health reimbursement account that includes a $1,000 savings account contributed by her employer, the government. She is responsible for another $600 before insurance -- which includes a 20 percent co-payment for in-network care (40 percent for out of network) -- kicks in. How well has it worked?</p>
<p>“Let me tell you,” she said at the gathering, “my experience has been awful. I don't consider it consumer-directed, and it certainly is not consumer-friendly. I have a Ph.D. in health policy and also a law degree, and if that's not an informed consumer … . It's impossible to tell what's covered. I had allergies … [and] a bum knee and needed physical therapy. They still can't tell me exactly how much I owe. Some things are paid for under the $1,000 at first, but not covered if you don't use it in the $1,000 and have to seek care for it later on. Some things make your doughnut grow bigger; for example, if you use out-of-network services. … I found out my allergy shots were $700 and my colleague … who has [the] same doctor, his allergy shots were $400. So I wouldn't say it's an open box, I would say it's a black box.”</p>
<p>Conservatives, however, are hoping that most consumers won't oppose these changes, especially if employers gradually transition to consumer-directed plans and much greater employee costs. “If you put a frog in hot water, it will jump out,” says Dr. David Himmelstein, a founder of Physicians for a National Health Program. “But if you put it in cold water and slowly boil it, you can cook it.” Hopefully consumers will tell employers exactly what they think of these plans before the entire health-care system has been cooked. </p>
<p><i>Barbara T. Dreyfuss is a freelance writer. She was a Wall Street health-policy analyst for many years.</i></p>
</div></div></div>Fri, 13 Aug 2004 06:44:34 +0000143776 at http://www.prospect.orgBarbara DreyfussThe Seductionhttp://www.prospect.org/article/seduction
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>Last July, as the debate over a Medicare prescription-drug bill heated up, AARP, the nation's largest senior-citizen lobbying organization with some 35 million members, sent a letter to Congress detailing issues that "must be fixed" before it could endorse a final bill. Among the group's chief concerns were "program structure and the adequacy and affordability of the benefit package." If the legislation "does more harm than good," AARP warned, the group would oppose it. Coverage in the press painted an ominous picture: AARP might be ready to pull the plug on the drug bill.</p>
<p>
In the White House, aides to presidential adviser Karl Rove were worried. They were counting on AARP to help them enact a drug benefit that President Bush could champion in his re-election bid. Now it seemed that AARP was threatening to hang tough on key issues that the Republicans would have a hard time endorsing.</p>
<p>
The conference committee was getting ready to work on a final bill. Democrats, largely excluded from the room, had been encouraged by AARP's letter to the Hill, believing they had an ally in opposing GOP efforts to undermine traditional Medicare. After all, as everyone thought, AARP was, at least on Medicare, essentially a Democratic ally. And this view was encouraged by AARP CEO Bill Novelli, who intimated to Hill Democrats that he was with them on the drug bill. </p>
<p>
Barry Jackson, deputy assistant to the president, got on the phone to Chris Hansen, AARP's associate executive director in charge of policy, to determine if AARP was, in fact, planning to stand tough on issues many Democrats were adamant about.</p>
<p>
It was not. After talking with Novelli and Lisa Davis, the group's communications director, Hansen sent Jackson a reassuring e-mail, obtained by <i>The American Prospect</i> and made public here for the first time. The e-mail indicated that AARP was really willing to settle key issues very easily. "Privately, we are suggesting some fairly moderate ways for handling the biggest issues in an effort to find an agreement that can be passed," wrote Hansen, a former aerospace lobbyist. "We are well aware of the negative advocacy that is building from a variety of groups. Some of that advocacy is now being directed at us. It is not going to change our course on this ... . We know that there may be details that we will message differently but we are together on the big goal."</p>
<p>
Democrats didn't know about Hansen's e-mail. In fact, when recently told about it, one Democratic staffer expressed shock and said that AARP "double-crossed us." But the GOP's business allies saw the e-mail. The White House sent it out to key Republican lobbyists and such groups as the National Association of Manufacturers and the Business Roundtable to make sure they knew that AARP was still on board. Over the next weeks, AARP leaders worked closely with House Speaker Dennis Hastert and Senate Majority Leader Bill Frist to craft a final bill. It passed the House on November 22 in the early morning hours, when GOP leaders left the vote open for a totally unprecedented three hours after they were initially unable to get the votes needed for passage. </p>
<p>
Three days later the bill passed the Senate and, on December 8, President Bush signed it into law, which AARP hailed as "an important step toward fulfilling a longstanding promise to older and disabled Americans." Suddenly, the AARP wasn't looking like such a liberal Democratic ally.</p>
<p>
For many Democrats, AARP's support for last November's Medicare prescription-drug bill came as a total shock. Not only could the law cause millions of seniors to lose more generous employer and state-coordinated drug benefits while providing only limited help to others; it is a major step toward the Republican Party's goal of privatizing Medicare and decimating employer-based health coverage. </p>
<p>
To those few who were really watching closely, however, AARP's actions were not a surprise at all, and the group's conversion was anything but sudden. The story of the Republicans' seduction of AARP unfolded over nearly a decade, as GOP leaders cajoled, seduced, and occasionally threatened the group's leaders into changing their ways and accepting the reality of Republican congressional control. Today, with bad policy already law, the stakes are incredibly high, as regulations to implement the law loom, along with bills to repeal some of its worst aspects. And they will grow higher still if President Bush is re-elected and Republicans can continue toward their ultimate goals. As the battle to preserve Medicare unfolds, Democrats who were surprised by the bill's passage last November should understand a key part of the story, which has not been told, of how it happened.</p>
<p>
Possibly the least surprised man in Washington last fall was Newt Gingrich. The former House speaker, who told a Blue Cross conference in 1995 that Medicare as a "government monopoly plan" was going to "wither on the vine" in favor of a Republican-designed "free-market plan," has spent the last nine years manipulating AARP. </p>
<p>
Aided by a coterie of Republican representatives and lobbyists, as well as a headhunter firm whose Washington office is run by a Republican operative, Gingrich helped maneuver AARP from the Democratic to the Republican column. The crucial moment arrived in June 2001, with the ascent to the executive director post of Novelli, who centralized policy making by limiting input from local AARP leaders and who brought with him a team of corporate executives to run the group's federal and state policy -- people much more comfortable with Republicans, open to private plans and market-oriented policies, and more willing to make deals than many of the veteran staff. </p>
<p>
Gingrich waxes eloquent about Novelli, who, he told me in a recent interview, "has a long history of supporting individual responsibility in health care and doesn't want seniors dependent on government handouts." Novelli, in turn, felt so comfortable with Gingrich that he invited him to join an advisory panel Novelli had crafted from associates he has met over the years. The panel meetings, which have since concluded, discussed AARP's future strategies, as well as insurance and other products that AARP might offer. Novelli says, "I started an advisory committee to the CEO because I wanted to test the idea that outside, independent, creative thinkers could help me and our senior management acquire new perspectives. The committee included people from every sector and political stripe."</p>
<p>
For Gingrich, the Medicare bill is just the beginning. The former House speaker hopes that Novelli's AARP will help him remake the entire employer-based health-care system as well. And he has reason to be optimistic. Gingrich asked the AARP chief to write the introduction to his new book about transforming health care, <i>Saving Lives and Saving Money</i>. In it, Gingrich lambastes the current health-insurance system, instead advocating one in which a person has "an economic interest in his or her own health and is the primary guardian of how his or her own money is spent." Novelli does not distance himself from Gingrich's ideas. In his foreword, he writes that "Gingrich's ideas are influencing how we at AARP are thinking about our national role" in the health-care debate. He says he wrote the foreword because "whether one agrees or not with Gingrich's politics, the book has interesting and important ideas about transforming the American health care system."</p>
<p>
Asked specifically whether he agrees with Gingrich's criticism of the current third-party health-insurance system, Novelli leaves the door open. "AARP does not have a policy on changing the third-party system," he told me. "But in order to sustain an important program like Medicare, when the number of beneficiaries and health-care costs continue to rise, policy-makers must consider viable changes to how the program is financed and operated. This applies to the entire American health-care system as well."</p>
<p>
Of course, AARP was never considered militant. It was founded as an insurance business in 1958, and the organization, then called the American Association of Retired Persons, opposed the creation of Medicare. (Its name was changed in 1999 to simply AARP, just an abbreviation, to de-emphasize its focus on retirement issues such as Medicare and to attract baby boomers still in the workforce.) It never developed an activist orientation, and for many years its focus was on selling insurance. In 2002, about 24 percent of its operating revenue came from health-insurance-related activities.</p>
<p>
But its leadership in Washington, and around the country, consisted mostly of Democrats committed to maintaining Medicare as a strong government-run program. AARP helped pass a major expansion of Medicare in 1988. With Democrats controlling the House for 40 years, AARP's lobbying efforts in defense of Medicare were never really tested because the only argument that ever took place among Democrats revolved around how much to expand the government-run program.</p>
<p>
But that changed after Republicans swept Congress in the 1994 elections. Republicans targeted Medicare for major cuts, but they knew that AARP would be a formidable obstacle. Some Republicans could not stomach working with an AARP that then-Majority Leader Trent Lott called an "arm of the Democratic National Committee." Others felt that AARP was "the enemy" that had to be replaced by newly created, Republican-controlled senior groups. But Gingrich, from the beginning, believed that AARP could be, as one Republican congressional staffer put it to me, "defanged."</p>
<p>
When the Republicans took control of Congress in 1995, AARP was headed by the soft-spoken, mild-mannered Horace Deets. A former priest, Deets had worked his way up at AARP beginning in 1975. In 1988, Deets became acting executive director when AARP's chief, Republican Jack Carlson, a former U.S. Chamber of Commerce executive and Nixon administration official, was forced out after only four months. Carlson ran afoul of the board because he was not a staunch advocate of government social-insurance programs, instead backing private-sector solutions. </p>
<p>
After the Carlson experience, AARP's board wanted to make sure that the next executive director would be someone committed to a government social-insurance program, as well as someone with a management style more attuned to a consumer-advocacy group. Deets apparently fit the bill and, after only two months, was given the executive director slot, a position he held until his retirement in 2001.</p>
<p>
Gingrich had courted AARP even before the 1994 Republican congressional victories. He was introduced around by Marty Corry, who headed AARP's federal-affairs office then and recently became a special assistant to former Medicare chief Tom Scully, playing an important role in brokering the Medicare prescription-drug deal. Corry wanted to reach out to Gingrich, the likely speaker, should the Republicans take control of the House. After the election, Gingrich and his aides held a series of regular breakfast meetings with Deets and senior policy staff. But gopers excluded AARP staff members they believed were less malleable. One was John Rother, then AARP's legislative director. "We always saw Rother as a [Democratic National Committee] apparatchik," says Ed Kutler, who was Gingrich's chief health-care staffer at the time. The GOP-AARP meetings expanded to include Republican leaders Tom DeLay, John Kasich, and Bill Archer. </p>
<p>
Throughout the early period of GOP control, congressional leaders maintained a steady drumbeat about the need to make Medicare cuts. Naively, perhaps, AARP leaders believed they were starting to convince Republicans that cuts weren't the only way to maintain the program's solvency, that costs had to be contained. But Republicans like Gingrich and Thomas, who agreed that costs should be curbed, insisted that the only way to do so was by getting private insurers to run the program, something AARP opposed. While AARP was sitting down to breakfast with the GOP leadership, these same leaders were launching an onslaught against Medicare as part of their budget-balancing goal. Republicans proposed taking the bulk of government cuts from beneficiaries as well as health-care providers. Their plan included cutting $270 billion from Medicare over seven years, including a whopping $51 billion from beneficiary payments. </p>
<p>
While the House leadership was quietly courting AARP, in the Senate, the acerbic Alan Simpson declared all-out war against the group. Helping to orchestrate Simpson's effort was his aide Chuck Blohaus, now a White House domestic-policy official, whose expertise is privatization of Social Security. Blohaus' blitzkrieg would have the effect of softening up AARP even further to Gingrich's seduction.</p>
<p>
In April 1995, Simpson launched an investigation into AARP's finances, including its receipt of government grants, which expanded in June into public hearings on the organization's tax-exempt status. "After the hearing, I said to them, 'I want to talk to your board,'" Simpson gloats. He told them that Deets, whom he derides as "a Svengali, a puppeteer," was manipulating them. Privately, according to former AARP officials, Simpson also told AARP that he might not pursue his investigation so intensely if the group would back off its fight against Republican balanced-budget efforts. "People like Simpson, who started looking at AARP early on, may have had the effect of moving them toward the middle of the political spectrum," says Jim Link, a former Simpson staffer.</p>
<p>
Aiding Simpson were a coterie of "seniors" groups that had been created by archconservative and direct-mail guru Richard Viguerie, including the United Seniors Association, the Seniors Coalition, and the 60 Plus Association. They hired former Republican representatives to lobby and coordinate activities. Although founded years earlier, none of these groups were very active on Capitol Hill until the Republican takeover. Suddenly they were invited to testify in support of Republican Medicare cuts. Jim Martin, president of the 60 Plus Association, testified in 1995 against AARP, arguing that as a lobbying group, it should not be allowed to receive federal grant money. Through public statements and reports detailing AARP activities and finances, these groups attempted to discredit AARP. A bumper sticker distributed by 60 Plus declared, "AARP: Association Against Retired Persons.'' </p>
<p>
Deets remains defensive about that period, insisting that the Gingrich-Simpson good cop-bad cop routine had no effect on his former organization. "We clearly had a difference of opinion on how to reduce the deficit, and the [Simpson] hearings produced absolutely nothing," says Deets. "I can only see them as a way to embarrass and weaken us in the public eye. They didn't succeed." </p>
<p>
But Deets is wrong. While AARP lobbyists may have continued to oppose Republican budget cuts behind the scenes, Gingrich's courting and Simpson's vitriol did blunt AARP's public attack on the Republican budget policies and help to distract and wear down the group's lobbyists. "We were aware [Simpson] was looking over our shoulder," admitted one former senior AARP lobbyist.</p>
<p>
Perhaps there was little that AARP could have done to stop the Republican onslaught that year. But while other senior groups such as the labor-allied National Council of Senior Citizens were demonstrating against the Republican policies in the summer of 1995, AARP waited until October to launch its ads, mailings, and rallies against the Republican balanced-budget policies. In late November, Congress passed a plan to slash a whopping $270 billion from future Medicare spending. Only opposition from the Clinton White House stopped its implementation.</p>
<p>
By 1997, AARP was working closely with Republican House leaders to craft the Balanced Budget Act of 1997, which again made significant, although less severe, cuts in the program and took a major leap in opening Medicare to private insurers. </p>
<p>
Republican efforts to decimate Medicare had, throughout 1996, been blunted -- by presidential vetoes, government shutdowns when Congress and the White House could not agree to a budget, Republican election losses due to GOP support for $270 billion Medicare cuts, and opposition by Democrats. But by 1997, the Clinton White House and Republican congressional leaders were ready to have serious discussions on a balanced-budget deal and agreed on many of the provider payment cuts. Yet several key contentious issues remained, including how much to pay HMOs, their role in Medicare, how much to increase what Medicare enrollees paid, whether to make wealthier beneficiaries pay more for coverage, and whether to raise the Medicare eligibility age from 65 to 67. </p>
<p>
AARP made a crucial decision. Rather than maintain an aura as a Democratic-leaning organization, it decided to promote itself as nonpartisan and to work closely with Speaker Gingrich on the details of a budget bill. Key Republican leaders such as Ways and Means Committee Chairman Bill Thomas hoped to dramatically expand the role of private insurers in Medicare as part of the Balanced Budget Act. Democrats by this time were entreating AARP to "kill the privatization scheme in its cradle," but those entreaties were refused. In the end, the Balanced Budget Act created the Medicare Plus-Choice program, which allowed beneficiaries to enroll in a broad array of private insurance programs beyond HMOs. AARP officials believed that they had blunted some of the worst aspects of the programs. But some Hill Democrats contend that, by working with Gingrich, AARP had stymied efforts to improve aspects of the budget bill. </p>
<p>
Throughout, AARP made no public criticisms of Republican plans. Gingrich credits the group's silence with keeping the managed-care provisions in the bill. Gingrich said in an October 2003 interview with the online version of <i>Health Affairs</i>, "When all the vicious, mean ads came out, the average senior citizen read his AARP bulletin ... and said, 'Well, that scare stuff sure can't be true because AARP would be raising hell if it was true.'" Today, Gingrich says that he "worked hand in glove with [Deets] and his staff on the Medicare Reform Act that we signed into law in 1997. And we could not have passed that without [Deets'] help." </p>
<p>
During these same years, AARP was very reticent about taking prominent stands on such important issues as health-care reform or a Medicare prescription-drug benefit. The group gave very limited support to the Clinton Health Security Act and gave only modest support to Democratic congressional health-care-reform efforts that came later. But on the state level, with staff and volunteers that were often more activist than the national officers, there was more clamoring for curbs on drug prices, as well as universal health insurance. In Wisconsin and California, for example, local AARP volunteers began advocating universal state-run health-care plans. In some cases, AARP's national office did help local people draft more progressive proposals. </p>
<p>
In 1998, Deets talked privately about retiring, and in January 2000, he brought Novelli into AARP in a newly created position overseeing public policy, communications, human resources, and advertising. Novelli says he decided to take the job in order to have a shot at being CEO. Deets knew Novelli from the 1980s, when Novelli's public-relations firm, Porter-Novelli, did a health campaign for AARP. </p>
<p>
As AARP was getting ready for a transition in early 2001, the larger political scene underwent a major change of its own. Suddenly AARP was faced with a Republican in the White House, as well as GOP control of Congress. A former AARP legislative staffer describes the mood at AARP as fatalistic, saying, "People said Republicans are setting the agenda and there is not much we can do." Gingrich, who was now in the private sector but still keeping an eye on AARP, saw an opportunity to cement a relationship between the new administration and the seniors' group. He contacted the Bush transition team. Josh Bolton, in line to be White House policy director, called AARP, which flew staff to Texas to talk to the new administration. </p>
<p>
That May, the AARP's board announced that Novelli would succeed Deets. But before Deets left, he brought Novelli in to meet with Hastert, Thomas, and White House health-policy staff.</p>
<p>
Gingrich had first talked extensively with Novelli at the farewell dinner for Deets and was delighted to find himself very comfortable with the new executive director. "We really met the night they had a going away party for Horace Deets, and they asked me to be one of the speakers at the dinner," Gingrich says. "Afterward, we were so simpatico in our affection for [Deets] and our concern for finding solutions for the baby boomers, and that's really what brought us together." </p>
<p>
Although they didn't have any direct involvement in Novelli's selection, Republicans were concerned about maintaining, and perhaps increasing, relationships with AARP. The fact that AARP's top post was available was discussed at a March 2001 meeting of the "K Street Project," according to the newspaper <i>Roll Call</i>. The group includes prominent GOP lobbyists and Hill members led by Senate Republican Conference Chairman Rick Santorum. It meets regularly to discuss policy and job openings. Other articles about the K Street Project also appeared at the time.</p>
<p>
Leaks about the Republican powwow were hardly coincidental. They were designed to get the message across that associations and corporate offices had to hire people who could work with Republicans if they wanted to get anything done in Washington, say Republican insiders. "You don't necessarily have to call and tell an association you want them to hire more people able to work with Republicans," says Grover Norquist, president of Americans for Tax Reform and one of Washington's most important Republican strategists. Norquist says that when newspapers reported about the </p>
<p>
"K Street Strategy," which he helped create, the message was clear. "It's an open conspiracy," he says, "not a closed one." </p>
<p>
Many Democrats were hopeful that Novelli, an affable man with a grandfatherly smile and a "brilliant marketing mind," in the words of one acquaintance, would make AARP a strong active force for social progress. He was known for efforts to promote public-health campaigns through social marketing, and as a leader in the efforts to stop teen smoking.</p>
<p>
But had Democrats looked, they would have seen, sprinkled throughout Novelli's career, warnings of what was to come. Novelli had first honed his marketing skills on behalf of Richard Nixon. He worked in 1972 with the November Group, the in-house advertising unit that helped devise attack ads against George McGovern. Then, during the 1980s, he turned his marketing skills toward helping the pharmaceutical industry. Although Porter-Novelli is often touted as a social marketing firm because of the public-health campaigns it did for such federal agencies as the National Cancer Institute, it used its government work to attract corporate clients. When Novelli left Porter-Novelli in 1990, the firm's clients included Bristol-Myers, Ciba-Geigy, Hoechst-Roussel, Hoffman-La Roche, Marion Merrill Dow, SmithKline Beecham, and the trade group Pharmaceutical Manufacturers Association. </p>
<p>
Key Republican insiders first worked extensively with Novelli when he headed the National Center for Tobacco-Free Kids. Novelli likes to cite his work for this organization as proof of his concern for consumer interests. But activists charge that he accepted a very bad deal that protected the tobacco industry; the settlement put the tobacco industry under nominal Food and Drug Administration oversight, but it also immunized the industry from class-action lawsuits and punitive damages. Critics further charge that Novelli's tactics split the movement, preventing efforts on Capitol Hill to toughen the agreement. To sell the plan on Capitol Hill, Novelli hired the man who had been Gingrich's closest congressional ally, Vin Weber, along with Ed Kutler, Gingrich's former health staffer. They helped the staff at Tobacco-Free Kids get comfortable talking to Hill Republicans. gopers who worked with Novelli then say he was very open to discussions and "very fair-minded." </p>
<p>
But many leaders of the anti-tobacco movement who watched the way Novelli operated on the Medicare bill felt like they were watching a rerun of a bad old movie. When AARP jumped on the Republican's Medicare bandwagon last year, "E-mails started zooming throughout the anti-tobacco community saying, 'It's Bill Novelli, at it again,'" says leading tobacco-control activist Stanton Glantz of the University of California, San Francisco's Center for Tobacco Control Research and Education.</p>
<p>
When Novelli took the helm at AARP, he began to exert greater control over the organization's national network and to centralize its message. It was a move that may have helped isolate the national staff from more activist local voices.</p>
<p>
"Before, the national people were interested in what we said at the local level and ... [we] would suggest changes that went to the national legislative committee," asserts Paul Kusuda, who was a member of Wisconsin's State Legislative Committee and its Capital City Task Force. Now, he says, AARP has a different view of "grass roots -- it's dictated from the top, not by the bottom."</p>
<p>
Jason Kay, a former AARP legislative staffer in the Midwest, noted that Novelli started to "centralize a lot of what the organization put forward as its face." "In the good old days, AARP was very attuned to its members," says Judy Kohler, who worked on advocacy in the AARP's Midwest region until 2001. "We got input from chapters on what was important in the states." At the same time, Novelli severed the accountability of AARP's board to the membership. The national delegate convention's role in electing the board was eliminated, and now a self-selecting nominating committee chooses it.</p>
<p>
Today, people who ruffle too many feathers are leaving or are not invited back into leadership roles. Susan Catania, former AARP Illinois state president, was not asked to continue in that role in 2002. She had become very upset with the national office for refusing to back a prescription-discount-card plan in the state legislature, a plan AARP staff originally helped draft. Illinois state Representative Jack Franks, the Democrat who sponsored the bill, which was enacted into law last year, says, "Susan Catania supported my bill and they unceremoniously dumped her."</p>
<p>
Meanwhile, while exerting more control over the organization nationally, Novelli sought Washington staff who could reach out to Republicans. "[Gingrich] credits Novelli with recognizing [that] if they wanted a prescription-drug bill, that was what he'd have to do to get it with a Republican Congress," says Dan Meyer, former chief of staff for Gingrich. To find the right people, Novelli called on the executive search firm Korn/Ferry International and its managing director, Nels Olson, a well-connected Republican. Olson had worked in the first Bush White House, and in the 2000 campaign helped George W.'s communications campaign team. In 2002, Olson brought in a premier aerospace lobbyist, Chris Hansen, a 26-year industry veteran, as the AARP's director of advocacy, overseeing all its lobbying. </p>
<p>
Why would an aerospace executive be a useful addition to a public-policy advocacy group? Hansen "understands the employer perspective," says Ed Kaleta, who heads government affairs for Caterpillar Inc. and coordinates the Business Roundtable's health task force. Although Hansen is not considered an ideologue, he is open to private plans and market-oriented approaches, according to people who have worked with him on health issues. Hansen demurs. He says he does not believe Medicare's financial problems "are insurmountable, nor does it mean we have to shift the cost to individuals or to privatize things."</p>
<p>
Hansen soon moved up to oversee all grass-roots and community-service work, as well as lobbying and policy. Korn/ Ferry then helped Hansen bring in Mike Naylor to take Hansen's old job overseeing the lobbying. Naylor had spent the last 18 years as a government-relations executive for such corporations as John Deere and AlliedSignal. Novelli says that bringing in new people "changed the culture at AARP, making it more aggressive and agile." And more accepting of a market-oriented approach to health care.</p>
<p>
It was Novelli, Hansen, and Naylor who orchestrated the AARP's approach to the Medicare prescription-drug bill, working closely with Hastert and Frist. Frist had first developed a good working relationship with AARP when Deets was invited to be on the board of the Alliance for Health Reform, set up by Frist and Democratic Senator Jay Rockefeller. Gingrich, who was helping the House leadership keep reluctant conservatives behind the bill, had always counted on AARP being willing to negotiate, rather than acting as an advocacy group. In a conference call last August to members of his health-care think tank, Gingrich stated, according to a summary, "[T]he internal debate for the administration is whether the center of focus is on pleasing the Senate Democrats or on pleasing AARP. They can't possibly pass a bill that has both groups opposed to it. My bet is on AARP." </p>
<p>
It appears that Gingrich's bet paid off.</p>
<p>
AARP is now at a crossroads. About 60,000 members have already quit in outrage over the law, and a March <i>USA Today</i>/CNN/Gallup Poll shows a majority of both enrollees and the general public now opposing it. The group has given its imprimatur to policies that will in fact cover only about 25 percent of seniors' prescription-drug costs and prevent those who enroll from purchasing any supplemental insurance to cover the difference. Beyond that, the law may spell the beginning of the end for publicly financed and run health care for the elderly and will call into question the future of employer-sponsored insurance for workers. Opposition to the measure is likely to grow as seniors increasingly understand its provisions, which include caps on federal Medicare payments, a voucher program, a significant boost to private insurers, and the means testing of beneficiary payments. And their anger over the drug provisions will likely grow as many lose generous employer and state benefits in return for bare-bones coverage. What's more, workers are likely to feel the impact next year as employers offer them the costly and skimpy plans allowed under the new law.</p>
<p>
AARP has maintained that it couldn't wait for a perfect bill, that the group's option was to take what passed or have nothing. Now the question for it will be whether it will back efforts by Democrats to repeal the worst aspects of the law and provide a real drug benefit.</p>
</div></div></div>Wed, 12 May 2004 10:01:58 +0000143454 at http://www.prospect.orgBarbara Dreyfuss